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, then the lender may secure a deficiency judgment against the borrower for the $50,000 difference. Whether your lender can sue you to recover this difference, also known as the deficiency, depends on the laws of your state.
Tennessee allows lenders to sue borrowers to recover the deficiency after a foreclosure. A deficiency judgment can have serious consequences, such as wage garnishment or the freezing of bank accounts. Therefore, if you’re facing foreclosure in Tennessee, it is important to understand the procedures and protections available to borrowers in Tennessee.
Foreclosures in Tennessee are primarily nonjudicial, meaning a lender may foreclose without going to court. A lender may pursue a deficiency judgment after either a judicial or nonjudicial foreclosure.
The amount of the deficiency judgment will generally be the difference between the outstanding loan amount and the foreclosure sale price. However, if the borrower proves that the foreclosed property sold for an amount materially less than fair market value, the court will limit the deficiency judgment to the difference between the outstanding mortgage debt and the fair market value of the property. Tenn. Code Ann. § 35-5-118.
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 Tennessee’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 Tennessee’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.