In Pennsylvania, foreclosures are judicial. The lender files a lawsuit against the borrower and obtains a judgment from the court. As in most judicial foreclosure states, the lender may obtain a deficiency judgment against a borrower in Pennsylvania. A "deficiency judgment" is a money judgment for the difference between the foreclosure sale price and the total mortgage debt.
In some states that use judicial foreclosure procedures, the lender can get a deficiency judgment as part of the foreclosure lawsuit itself. In other places, the lender has to seek a deficiency judgment by filing a separate lawsuit after the foreclosure.
The lender must file a separate lawsuit to recover a deficiency following a Pennsylvania foreclosure. (42 Pa. Cons. Stat. Ann § 8103[a]). The lender has to file the suit within six months after the execution (signing) and delivery of the sheriff's deed. (42 Pa.C.S. § 5522[b]). But if the foreclosing lender buys the property at the foreclosure sale, the deficiency is limited by the property's fair market value. (42 Pa. Cons. Stat. Ann § 8103[a]).
For example, say the mortgage debt is $300,000, and the lender bids $250,000 at the foreclosure sale. The lender's credit bid is the highest bid, and it becomes the new owner of the home. In this scenario, the deficiency is $50,000 ($300,000 minus $250,000). So, under Pennsylvania law, the lender could file a subsequent lawsuit to recover the $50,000 deficiency. But if the property's fair market value is $275,000, then the lender can obtain a deficiency judgment for only $25,000, which is the total debt less the fair market value ($300,000 minus $275,000).
This limitation aims to prevent a lender from making an artificially low bid to create a large deficiency that it would then try to collect from the borrower. When the lender files its lawsuit for a deficiency judgment, it must ask the court to determine the property's fair market value. The lender will present evidence that the home's value is as low as possible, which would maximize the borrower's deficiency liability. So, it's a good idea for the borrower to present evidence showing that the fair market value of the property is as high as possible to minimize the potential deficiency liability. (42 Pa. Con. St. Ann. § 8103(c)).
In a short sale, the homeowner sells a property for less than is owed on the mortgage. The lender agrees to accept this "short" amount in exchange for releasing the mortgage lien. Unless the lender agrees to add a provision to the short sale agreement that states the transaction fully satisfies the mortgage debt, the lender retains the right to get a deficiency judgment.
But the lender doesn't automatically get a deficiency judgment against the borrower. The lender must file a lawsuit to get the judgment. If you intend to complete a short sale and want to avoid the risk of being sued for the deficiency, ask your lender to include language in your short sale agreement that you won't be liable for any deficiency after the short sale closes.
A deed in lieu of foreclosure is a transaction in which the homeowner deeds the title to the property directly to the lender. In exchange, the lender agrees to release the mortgage lien. In most instances, a deed in lieu will fully satisfy the debt; but a deficiency could happen with this type of transaction. If the deed in lieu documents clearly state that a deficiency exists and the amount, the borrower remains liable for the deficiency. Generally, with a deed in lieu, the deficiency is the difference between the home's fair market value and the total mortgage debt. To avoid liability for this amount, ask the lender to agree that the transaction completely pays off the debt. Be sure to get this agreement in writing. You might have tax consequences if the lender forgives all or some of the deficiency.
With both deeds in lieu and short sales, it's possible to negotiate a reduced deficiency or pay a lump-sum settlement regarding any remaining debt associated with the transaction. You might also consider filing for bankruptcy. Bankruptcy might not be a good idea if a deficiency is your only debt, but eliminating your liability for this amount is an additional benefit if you're already considering declaring bankruptcy.
If you're a Pennsylvania homeowner who's behind in mortgage payments and want to learn whether the lender is likely to seek a deficiency judgment, if you have any defenses to the foreclosure, or need information about different ways to avoid a foreclosure, consider talking to a lawyer. If you can't afford an attorney, a HUD-approved housing counselor can tell you about foreclosure avoidance options.