Mortgage Balance After Foreclosure and Sale of House

A mortgage is a debt of the borrower. And, the borrower is liable for the full amount borrowed according to the terms of the agreement. Upon signing the promissory note and mortgage, the homeowner pledges his house as collateral for the loan s/he promises to repay. 

Collecting the Debt through Foreclosure

When a home is foreclosed on for defaulting on a mortgage, the bank or other lender takes possession and then sells it at a foreclosure sale to recover the balance of the borrower's loan. Foreclosure sales typically bring in less than at a normal house sale, even in a robust sellers' real estate market. After the home is sold, the proceeds, less certain costs, are applied against the amount remaining on the loan.

Additional Obligations of the Defaulting Borrower

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 house. When this is the case, once 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”. The home may be the collateral for 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. Then, the lender’s only recourse is to foreclose on the home. A few states allow deficiency judgments if the lender forecloses using the full judicial procedure, rather than a more streamlined summary or administrative process. However, subject to those few exceptions, if a home is foreclosed upon with a balance remaining on the loan after application of the foreclosure sale proceeds, the lender can sue the borrower for that remaining balance. It is therefore vital to check the laws of your state, to learn about your rights after foreclosure.