A deficiency is the amount that remains if the proceeds from a foreclosure sale do not cover the entire mortgage debt. For example, if a homeowner owes $250,000 to the lender and the property sells at the foreclosure sale for only $200,000, the deficiency is $50,000.
In some states, including Iowa, the lender is allowed to sue the homeowner to recover the deficiency. Once the lender obtains a deficiency judgment from the court, the lender can try to collect the judgment by garnishing the borrower’s wages or levying the borrower’s bank accounts.
Foreclosures in Iowa may be judicial or nonjudicial. Judicial foreclosures are handled through the court system and are initiated when the lender files a lawsuit against the borrower, while nonjudicial foreclosures are processed without any judicial oversight. Iowa further divides its nonjudicial foreclosures into alternative nonjudicial voluntary foreclosures and nonjudicial foreclosures of nonagricultural mortgages. In an alternative nonjudicial voluntary foreclosure, the homeowner avoids a foreclosure lawsuit by voluntarily conveying all of its rights in the property to the lender. Iowa Code § 654.18. Nonjudicial foreclosures of nonagricultural mortgages are allowed for properties other than agricultural properties and one- to two-family dwellings occupied by the owner. Iowa Code § 655A et seq.
Iowa law generally allows lenders to sue borrowers for the deficiency, but there are restrictions. The lender may not get a deficiency judgment if any of the following are true:
In Iowa, there is no law prohibiting a lender from obtaining a deficiency judgment following a short sale or deed in lieu of foreclosure. Short sales and deeds in lieu of foreclosure almost always result in a deficiency. In a short sale, the borrower sells the home for less than the outstanding mortgage debt with the lender’s permission. With a deed in lieu of foreclosure, the borrower signs over ownership of the home to the lender and the lender agrees to release the borrower from its obligations under the mortgage.
If you hope to complete a short sale or deed in lieu of foreclosure and want to avoid a deficiency judgment, you need to negotiate with your lender to include in the short sale or deed in lieu of foreclosure agreement language releasing you from all mortgage obligations after the closing of the transaction. Without this language, the lender may attempt to obtain a deficiency judgment at some point in the future. If your lender refuses to release you from liability for the deficiency and is later awarded a deficiency judgment, your lender may be willing to negotiate a reduced lump sum payment or a payment plan.
To read the laws that govern Iowa foreclosures, access the Iowa Code from the website of the Iowa Legislature.