A mortgageis a debt of the borrower. While it is secured by the home, that is simply to provide a guaranty of some repayment to the lender. The borrower is liable for the full amount he or she borrowed, as per the terms of the mortgage agreement.
When a home is foreclosed on for defaulting on the mortgage, the bank or other lender takes possession of it. It then sells the home at a foreclosure sale. Foreclosure sales typically bring in less than a home would bring if it were sold normally, even in good real estate markets. After the home is sold, the proceeds of the sale, less certain costs of the sale, will be applied against the amount remaining on the loan.
In declining real estate markets, it is not unusual for a home to be worth less than its mortgage, especially if little money was put down, so that the borrower had little equity in the home. When this is the case, after the proceeds of the mortgage sale are applied, there may be an outstanding balance on the loan—the loan may not have been paid off in full even though the house has been resold.
In most states, the lender can then sue the borrower for this “deficiency,” or the remaining balance. This is called pursuing a “deficiency judgment.” This is because, as noted above, the home may guarantee the mortgage, but the mortgage is an obligation of the borrower, the same as any other loan. The borrower is responsible for making sure that the loan is paid off.
There are a few states that do not allow deficiency judgments; by law, the lender’s only recourse is to foreclose on the home. A few other states allow deficiency judgments only if the lender forecloses using the full judicial process, rather than a more streamlined summary or administrative process. However, subject to those few exceptions, as a general rule, if a home is foreclosed upon and there is still a balance remaining on the loan after the application of the proceeds of the foreclosure sale, the lender can sue the borrower for that remaining balance. It is therefore vital to check the laws of your state, to see what rights you may have.