A deficiency judgment is a court judgment entered against a borrower typically for the difference between the amount remaining due under the borrower’s mortgage loan and the amount the lender recovers in a foreclosure sale. In other words, if the borrower owes $200,000 on the mortgage, but the home is sold at a foreclosure auction for only $150,000, in some states the lender may secure a deficiency judgment against the borrower for the $50,000 deficiency, or difference.
New Jersey allows lenders to sue borrowers to recover the deficiency after a foreclosure. A deficiency judgment can have serious consequences for the borrower, such as wage garnishment or the freezing of bank accounts. Therefore, if you’re facing foreclosure in New Jersey, it is important to understand the process leading up to a deficiency judgment and protections available to borrowers in New Jersey.
Foreclosures in New Jersey are judicial, meaning a lender must sue a delinquent borrower in court to foreclose. A lender intending to pursue a deficiency judgment must file a separate lawsuit within three months from the foreclosure sale or, if required, the confirmation of the sale. N.J. Code Ann. § § 2A: 50-1 to 2A:50-2.1.
The borrower has the right to dispute the amount of the deficiency that the lender claims in the lawsuit. The court will then determine the fair market value of the property and may use that amount to determine the deficiency instead. For example, if the borrower owes $200,000 on the mortgage, the home is sold at a foreclosure auction for $150,000, the lender sues the borrower to recover the $50,000 deficiency ($200,000 minus $150,000), but the court determines that the fair market value of the home is $175,000, the amount of the deficiency judgment will be capped at $25,000 ($200,000 minus $175,000). N.J. Code Ann. § 2A: 50-3.
A short sale occurs when a borrower secures permission from the lender to sell the property for less than the outstanding loan amount. Because the borrower is selling the property for less than the amount owed, there is a deficiency by definition.
Nothing in New Jersey’s foreclosure laws prohibit a lender from suing a borrower for a deficiency after the closing of a short sale. A borrower pursuing a short sale should negotiate with the lender to include language in the short sale agreement releasing the borrower from liability for any deficiency that remains after the closing of the short sale.
In a deed in lieu of foreclosure, the borrower gives up all rights to the property and signs over the deed to the lender; in exchange, the lender releases the borrower from all obligations under the mortgage. There is no foreclosure. The lender simply takes title to the property, and the borrower walks away.
Although in the past, deed in lieu of foreclosure transactions typically included a release of the borrower from all obligations under the mortgage, there is nothing in New Jersey’s foreclosure laws prohibiting a lender from suing a borrower for a deficiency after a deed in lieu of foreclosure. If you’re hoping to complete a deed in lieu of foreclosure, you should negotiate with your lender to include in your deed in lieu of foreclosure agreement a release from all mortgage obligations.