Once a homeowner decides that a mortgage is no longer affordable and that it’s time to move on, the homeowner must generally choose from one of three options: allowing the home to be sold in foreclosure, selling the home in a short sale, or transferring title to the home directly to the lender with a deed in lieu of foreclosure. Whether the borrower sells the home through a short sale or the bank sells the home following a foreclosure or a deed in lieu of foreclosure, the final sale price may not be enough to cover the total amount that the homeowner owes to the bank. For example, if a homeowner owes $300,000 on a mortgage, and the home sells for only $250,000, there is a gap between the outstanding debt and the sale price of $50,000. This gap is called a deficiency.
Under certain circumstances, the lender may be able to sue the borrower to recover the deficiency. With a deficiency judgment from the court in hand, the lender has the right to garnish the borrower’s wages, freeze the borrower’s bank accounts, and place liens on the borrower’s other assets. The law on deficiency judgments varies greatly from state to state. Read on to find out whether deficiency judgments are allowed in Utah and under what conditions.
The most common method of foreclosure used in Utah is nonjudicial foreclosure, which allows lenders to foreclose outside of court by following a series of detailed procedural guidelines. Lenders may obtain a deficiency judgment following a nonjudicial foreclosure if they file a lawsuit to recover the deficiency within three months of the foreclosure sale. The maximum amount of the deficiency judgment will be the difference between the total debt minus the fair market value of the property, or the total debt minus the foreclosure sale price, whichever is less. Utah Code Ann. § 57-1-32.
Going back to the above example, if the borrower owes $300,000 and the home sells for $250,000, but the fair market value of the property is $275,000, then the deficiency judgment will be capped at $25,000 (the outstanding mortgage debt minus the fair market value of the property), rather than the actual amount of the deficiency of $50,000 (the outstanding mortgage debt minus the foreclosure sale price). If the home sells for more than its fair market value, the borrower will be liable for the actual amount of the deficiency.
In a judicial foreclosure, the deficiency judgment may be entered as part of that action. Utah Code Ann. § 78B-6-902.
Utah law does not prohibit the lender from recovering the deficiency following a sale in connection with a deed in lieu of foreclosure. However, a lender will sometimes forgive or reduce the amount owed on account of the deficiency during the process of negotiating the terms of the deed in lieu of foreclosure. The borrower should ask the lender to include in the deed in lieu of foreclosure agreement language releasing the borrower from all obligations under the mortgage upon the closing of the deed in lieu of foreclosure transaction.
If the borrower sells the home through a short sale, Utah law allows the lender to recover the full amount of the deficiency, provided that the lender commences an action for the recovery within three months following the short sale. However, this three-month time limit does not apply if there is a written agreement between the borrower and the lender in which the borrower agrees to pay the lender all or part of the deficiency. Utah Code Ann. § 78B-2-312.