Defaulting on a mortgage loan will have consequences for a borrower. The scope of the consequences depends on whether the loan is recourse or non-recourse.
A recourse loan is a loan which allows the lender to take action above and beyond repossessing the home (through the foreclosure process) to recover the mortgage debt. In other words, the lender has recourse to the borrower’s assets other than the house securing the mortgage. If the lender is unable to satisfy the balance of the loan by foreclosing on and selling the home, it can sue the borrower to recover that balance, which is called the deficiency. If the lender wins the lawsuit and obtains a personal judgment against the borrower (known as a deficiency judgment), the lender will then be able to collect on that judgment by garnishing the borrower’s wages or levying the borrower’s bank accounts.
A non-recourse loan is better for the borrower (and riskier for the lender). If a borrower defaults on a non-recourse loan, the lender is limited to foreclosing on the home to satisfy the debt. Even if the lender recovers just a small portion of the outstanding mortgage debt, the lender has no further recourse and cannot obtain a personal judgment against the borrower.
Whether your lender has the right to sue you for the deficiency after foreclosure depends largely on the laws of your state. Most states allow lenders to sue borrowers for deficiencies. To find out whether your state allows deficiency lawsuits, see our page on Anti-Deficiency Laws by State.
Just because your lender has the right to sue you for the deficiency doesn’t mean that your lender necessarily will. Lawsuits are expensive. If your lender thinks it has little or no chance of recovering additional money from you, it’s unlikely that you’ll face a deficiency lawsuit.
To avoid a deficiency judgment, you should first try to avoid foreclosure altogether by pursuing a foreclosure alternative, such as loan modification, short sale, or deed in lieu of foreclosure. (With a short sale or deed in lieu of foreclosure, make sure to get in writing from your lender a release from liability for any debt that remains after the transaction closes.)
If foreclosure can’t be avoided and your lender successfully sues you for the deficiency, try negotiating with your lender to settle the judgment for a smaller amount or to pay the deficiency over time. Failing that, filing for bankruptcy will help you wipe out that debt. (For more on avoiding having to repay a deficiency, see our article How Are Deficiency Judgments Collected?)