Will You Owe Money After Foreclosure on Your House?

One of the common misconceptions about real estate foreclosure is that the homeowner, once defaulted and foreclosed, no longer has any financial obligation to the mortgage lender. Since the house has been taken away and put up for auction, it stands to reason that the homeowners wouldn't be a factor any longer, but this is often not the case. In fact, many homeowners who go through foreclosure are startled to find that they still owe money on the house.

The reason for this is that the mortgage lender almost always takes a fall at foreclosure. They secure the house as collateral for the loan on which you defaulted, but they are usually unable to sell the home for fair market value. In fact, it is common to see a foreclosed house selling for 70% less than what it is worth, which is sometimes a great deal less than the balance of the loan with the original borrowers. So yes, you could owe money after foreclosure.

For example, let's say that you borrowed $80,000 to purchase a $100,000 home. Over the course of the next five years, you pay off an additional $20,000, which leaves a balance of $60,000. Then you lose your job and fail to pay your mortgage for three months straight, and the bank decides to initiate foreclosure on your house. However, they only manage to sell the property for $30,000, meaning they are negative $30,000 on their original investment.

Subsequent to foreclosure, the bank can ask a judge for a deficiency judgment, which is a monetary judgment against the prior homeowner for the deficit. This is the same thing as any judgment won in civil court, with the original homeowners as the defendants and the mortgage lender as the plaintiff. The judgment can often be enforced by garnishing wages or placing liens against other property owned, and can be a real hassle in the long run.