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.
Washington allows lenders to pursue deficiency judgment but only in certain circumstances. A deficiency judgment can have serious consequences, such as wage garnishment or the freezing of bank accounts. Therefore, if you’re facing foreclosure in Washington, it is important to understand the procedures and protections available to borrowers in Washington.
Foreclosures in Washington are primarily nonjudicial, meaning a lender may foreclose without going to court. However, in Washington, deficiency judgments are not allowed after nonjudicial foreclosures. Wash. Rev. Code § 61.24.100.Therefore, a lender intending to pursue a deficiency judgment must do so by filing a foreclosure lawsuit against the borrower in court. Wash. Rev. Code § 61.12.070.
In a judicial foreclosure, the court may set a minimum bid price or conduct a hearing to establish the fair market value of the foreclosed property. The amount of the deficiency judgment is then limited to the lesser of the difference between the outstanding debt and the foreclosure sale price or the difference between the outstanding debt and the minimum bid price or fair market value. Wash. Rev. Code § 61.12.060.
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 Washington’s foreclosure laws prohibits 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. See this article on the risks of a short sale for more information.
With 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.
In Washington, a lender may not obtain a deficiency judgment after a deed in lieu of foreclosure. In the case of Thompson v. Smith, 58 Wn. App. 361 (1990), the court determined that because the deed in lieu of foreclosure was essentially a nonjudicial foreclosure, the borrower was entitled to protection under Washington’s anti-deficiency laws.