Learn if you may be required to pay a deficiency judgment after a North Carolina foreclosure.
If your North Carolina property sells in a foreclosure auction for less than the amount owed on your mortgage loan, you may be hit with a large charge. Because, under North Carolina law, the foreclosing lender may usually get a deficiency judgment. However, in other cases, state law prevents the lender from obtaining this kind of judgment, and the amount of the shortfall may be restricted. (For further information on what to do and what not to do during a foreclosure, see Foreclosure Do’s and Don’ts.)
In this article, you’ll discover what a deficiency judgment is, when the lender can’t seek one against you in North Carolina, and what happens to the deficiency in a short sale or deed in lieu of foreclosure.
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What Is a Foreclosure Deficiency Judgment?
In a foreclosure, the total amount owed by the borrower may surpass the foreclosure selling price. A “deficiency” is the difference between the total debt and the selling price.
Example. Assume you owe $300,000 on your house loan, including outstanding principle, interest, fees, and charges. However, your property sells for just $250,000 at the foreclosure auction. The shortfall is $50,000.
To collect the deficit, the foreclosing lender in certain jurisdictions may pursue a personal judgment (called a “deficiency judgment”) against the debtor. Typically, if a deficiency judgment is obtained against you, the lender may collect the amount—in our case, $50,000—through traditional collection procedures, such as garnishing your income or levying your lending account. (Learn about the many methods creditors employ to collect judgements.)
How Do Foreclosures in North Carolina Work?
In North Carolina, foreclosures may be nonjudicial, which means the lender does not have to go through state court. Judicial foreclosures are also permitted. The lender forecloses via the state court system in a judicial foreclosure.
Because nonjudicial foreclosures are the most common in North Carolina, this article concentrates on that method.
Deficiency Judgments Are Commonly Accepted
In North Carolina, a lender may get a deficiency judgment by suing you after a nonjudicial foreclosure.
Deficiency judgments are not permitted in the case of seller-financed, purchase money loans.
A deficit judgment is not permitted under North Carolina law if the mortgage was seller funded, purchase money mortgage, or deed of trust. (North Carolina General Statute 45-21.38).
Limitation on the Size of a Deficiency Judgment
If the lender (or current loan owner) acquired the house at the foreclosure sale for less than the home’s fair market value, the borrower may contest the shortfall amount. If the borrower can demonstrate that the fair market value of the property is more than the selling price, the borrower is only accountable for the difference between the fair market value and the entire debt under North Carolina law. 45-21.36 (North Carolina General Statutes).
Example. Assume the borrower owes the lender $300,000 once again. If the lender purchased the foreclosed house for $250,000, but the borrower establishes to a court that the home’s fair market value was $275,000. The deficit will be decreased from $50,000 to $25,000 ($300,000 – $275,000).
Because most foreclosure transactions result in the lender obtaining title to the property and a deficiency judgment, you may be able to contest a deficiency judgment by asserting a defense based on fair market value under this legislation.
Nontraditional and Rate Spread Loans Do Not Allow Deficiency Judgments
In a select cases in North Carolina, the lender is prohibited from pursuing a deficiency judgment after foreclosure. A deficiency judgment, for example, is generally not permitted if your mortgage is nontraditional (it allows you to defer payment of principal or interest and allows for negative amortization) or a rate spread home loan (where the annual percentage rate exceeds a certain threshold) and secures your primary residence. 45-21.38A of the North Carolina General Statutes. For further details, see the appropriate legislation or a local foreclosure attorney.
Deficiency Judgment in North Carolina Following a Short Sale or Deed in Lieu of Foreclosure
A short sale occurs when you sell your house for less than the entire amount of debt owed, and the profits pay down a part of the remainder. A deed in lieu of foreclosure (deed in lieu) occurs when a lender decides to take a deed to the property instead of foreclosing in order to get title to the property. (The deficiency amount with a deed in lieu is the difference between the total debt and the fair market value of the property.)
After a short sale or deed in lieu in North Carolina, the lender may get a deficiency judgment. In order to prevent a deficiency judgment in any of these cases, the agreement must specifically specify that the lender waives its right to the shortfall. If the contract does not include this waiver, the lender may sue for a deficiency judgment. However, if the lender forgives the shortfall, you may face tax implications.