North Carolina Laws on Post-Foreclosure Deficiency Judgments

Find out whether the lender can sue a homeowner for a deficiency after a foreclosure or short sale in North Carolina.

Losing one’s home to foreclosure can be extremely stressful. For some distressed homeowners, however, the sale of their home in a foreclosure auction does not necessarily mean their concerns are over. In some states, homeowners may be liable for deficiency judgments after foreclosure. If you’re facing foreclosure, determining whether your state allows deficiency judgments will help you decide what the best options are for you.

What is a Deficiency Judgment?

If a home is sold at a foreclosure sale for less than the amount owed on the mortgage, the difference is called the deficiency. In some states, the lender may file a lawsuit to collect the deficiency. A deficiency judgment is a money judgment as a result of such a lawsuit, holding a borrower personally liable to repay the deficiency.

Are Deficiency Judgments Allowed in North Carolina?

To find out whether deficiency judgments are allowed in North Carolina, you should look to North Carolina’s laws regarding deficiency judgments, which can be found in North Carolina General Statutes (N.C. Gen. Stat.), Sections 45-21.36, 45-21.38, and 45-21.38A. Detailed steps on how to locate North Carolina’s foreclosure statutes can be found in our article North Carolina Foreclosure Laws. A summary of North Carolina’s laws governing deficiency judgments can be found below.

Deficiency Judgments after Foreclosure

In North Carolina, a lender may obtain a deficiency judgment following foreclosure. However, North Carolina prohibits deficiency judgments in the following circumstances:

  • Nonjudicial foreclosure of purchase money mortgages. Lenders cannot seek a deficiency judgment after nonjudicial foreclosures of purchase money mortgages. N.C. Gen. Stat § 45-21.38.
  • Foreclosures of certain mortgages secured by the borrower’s primary residence. Lenders are prohibited from seeking deficiency judgments for non-traditional and rate spread mortgages recorded prior to January 1, 2010 and foreclosed nonjudicially, if the home secured by the mortgage was the borrower’s primary residence when the foreclosure proceedings started. For non-traditional and rate spread mortgages recorded on or after January 1, 2010, regardless of the method of foreclosure, deficiency judgments are prohibited if the home secured by the mortgage was the borrower’s primary residence when the foreclosure proceedings started. (A non-traditional mortgage is a mortgage that allows you to defer payment of principal or interest and provides for negative amortization such as Pick-a-Payment or Option ARM loans, and a rate spread home loan is where the annual percentage rate exceeds a certain threshold). N.C. Gen. Stat § 45-21.38A.

Deficiency Judgments After Deed in Lieu of Foreclosure and Short Sale

North Carolina does not have specific statutes regulating deficiency judgments after a deed in lieu of foreclosure or a short sale. Thus, the specific short sale or deed in lieu of foreclosure agreement negotiated by the borrower and the lender will determine whether the borrower remains liable for any balance owed on the mortgage. To be safe, borrowers should get from their lenders a written release of liability for any deficiency.

Defenses to a Deficiency Suit

North Carolina provides borrowers a statutory defense against a deficiency lawsuit. If the lender is the purchaser of the borrower’s home at the foreclosure sale, the borrower may defeat or offset any alleged deficiency by showing that the home’s fair market value equaled the amount of the outstanding mortgage or that the amount bid by the lender at the sale was substantially less than the value of the home. N.C. Gen. Stat § 45-21.36.

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