One of the biggest concerns that borrowers have following a foreclosure is whether or not they will still owe money to the lender. The answer to this question depends on whether or not their state allows lenders to obtain a deficiency judgment following the foreclosure. A deficiency judgment is a court order making the borrower personally liable to pay the deficiency (the difference between the outstanding mortgage debt and the foreclosure sale price) if the proceeds from a foreclosure sale do not cover the entire debt. This means that even though the house has been repossessed, the borrower remains responsible for any leftover debt. In a real estate market where it is commonplace for properties to be “underwater” (the balance owed on the mortgage outweighs the value of the home), this is a frightening concept for a lot of borrowers.
Lenders in Ohio may obtain a deficiency judgment, but that judgment is void two years after confirmation of the sale by the court. Ohio Rev. Code Ann. § 2329.08. Moreover, the property cannot be sold at the foreclosure sale for less than two-thirds of the appraised fair market value, which limits the amount of the deficiency to one-third of the property’s fair market value or less. Ohio Rev. Code Ann. § § 2329.20, 2329.17. To determine if a deficiency judgment has been entered against you in a foreclosure action, you can refer to the Entry Confirming Sale and Ordering Distribution of Sale Proceeds. This document will note if there is a deficiency judgment and show the amount owed.
It is worth mentioning that in Ohio a lender is not entitled to collect its attorneys’ fees from the borrower for the foreclosure action. This is quite different from many other states that allow lenders to tack attorneys’ fees on to the amount owed by the borrower and can increase a deficiency judgment. This is because Ohio follows the “American Rule” regarding the recovery of attorneys’ fees. That is, the prevailing party in a civil action may not recover attorneys’ fees as a part of the costs of litigation. In the case of Wilborn v. Bank One Corp., 2009 Ohio 306 (2009), the court restated that Ohio law prevents a lender from being awarded attorneys’ fees in a foreclosure or collecting such fees in a payoff (even though mortgage contracts typically include a provision allowing it) because to allow such fees would be against public policy. However, the court decided that the prohibition on attorneys’ fees does not apply if a loan is voluntarily reinstated. The bottom line is that even if the mortgage or promissory note states that the lender is entitled to attorneys’ fees, that provision is unenforceable in foreclosures and payoffs.
Nothing in Ohio’s foreclosure statutes prohibits a lender from recovering a deficiency following a short sale or a deed in lieu of foreclosure. If you’re considering a short sale or deed in lieu of foreclosure, make sure that the terms of the short sale or deed in lieu of foreclosure agreement clearly release you from the obligation to pay any deficiency.
The statute governing deficiency judgments in Ohio can be found in the Ohio Revised Code, Title 23, Chapter 2329, Section 2329.08.