Texas law allows lenders to pursue deficiency judgments after foreclosure

A deficiency judgment arises when the proceeds from a foreclosure sale fail to satisfy the outstanding mortgage balance, and a lender wins a lawsuit seeking payment of the difference.

The scenario looks like this – let’s say a home in Austin has a mortgage of $600,000, but the property value has fallen to $575,000. If the borrower falls behind and the home is sold at foreclosure for $550,000, the borrower still owes $50,000. This amount represents the difference between the loan amount, which is personally guaranteed, and the sale price.

See also: will I owe money after foreclosure?

In Texas, lenders are permitted to sue for a deficiency judgment after foreclosure but must do so within two (2) years of the sale. Texas Property Code – Section 51.003, which addresses deficiency judgments, contains the following provision:

If the price at which real property is sold at a foreclosure sale under Section 51.002 is less than the unpaid balance of the indebtedness secured by the real property, resulting in a deficiency, any action brought to recover the deficiency must be brought within two years of the foreclosure sale.

Texas courts will consider evidence of property value when awarding deficiency judgments

A deficiency lawsuit always hinges on property value. If a property is sold for far less than what it is worth, it isn’t fair to allow a lender to pursue a deficiency judgment. For this reason, Texas foreclosure laws allow a borrower to ask the court to determine the properties fair market value at the time of the foreclosure sale. In assessing a property’s value at the time of foreclosure, Texas courts will look to the following factors:

1. expert opinion testimony

2. comparable sales

3. anticipated marketing time and holding costs

4. cost of sale

5. The necessity and amount of any discount to be applied to the future sales price or the cash flow generated by the property to arrive at a current fair market value.

Deficiency balance reduced if borrower can show the sale price was inadequate

If the court determines that the sale price was less than the fair market value of the property, the borrower will be entitled to an offset against the amount of the claimed deficiency. For example, if Jim’s home in Dallas is sold at foreclosure for $200,000, he owes $300,000 on his mortgage and the bank sues for a $100,000 deficiency, expert testimony that the home was actually worth $275,000 would significantly reduce Jim’s liability for a deficiency. If the borrower fails to introduce evidence as to a property’s fair market value, the court will allow the foreclosure sale price to govern.

How likely is it that my lender will sue?

Although Texas gives lenders the right to pursue a deficiency judgment, there is no guarantee that your lender will sue you after foreclosure. Filing a deficiency lawsuit causes lenders to incur expenses that may not be justified if the borrower is judgment proof. In many cases, a long and drawn out mortgage modification process, that involved supplying detailed financial information, preceded foreclosure. Supplying financials as part of a mortgage modification attempt shows your lender what you own. Especially because Wage garnishment is not permitted in Texas, when a borrower’s financial statements show little to no assets, the likelihood that a lender will pursue a deficiency decreases. If a deficiency judgment is to be pursued, it is often filed by a second mortgage lender who often stands to lose their entire investment as result of a foreclosure sale. Even in the case where property values have dropped significantly, first mortgage lenders usually stand to recoup some of their investment by selling the collateral and will often issue a 1099-C  (forgive the debt) rather than filing a lawsuit.

If you have questions about Texas foreclosure law or are facing a deficiency lawsuit, the best course of action is to contact an attorney right away.

See also: chapter 7 bankruptcy in Texas: what you need to know

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