Deficiency Judgment

Understanding Deficiency Judgment

When a lender forecloses and sells the property, the sale price may be less than the outstanding loan balance. The difference—the deficiency—represents a loss to the lender. In states that permit deficiency judgments, the lender can obtain a personal judgment against the borrower for this amount.

Not all states allow deficiency judgments, and those that do often impose conditions: the lender must seek the judgment promptly, the amount may be limited to the difference between debt and fair market value (not just sale price), and certain loan types may be exempt.

For property investors, deficiency judgments matter in several ways. Properties may have old deficiency judgments recorded against prior owners that could cloud title. Understanding whether a property was subject to deficiency judgment—and whether it was satisfied—is part of due diligence.

For borrowers facing foreclosure, the possibility of deficiency judgment affects decision-making. In non-recourse states or with non-recourse loans, walking away from an underwater property eliminates debt. In recourse situations, the debt may follow the borrower.

Real-World Example

Texas-Specific Information