Also known as: deficiency judgment · deficiency judgements · deficiency decree
Written by attorneys — see sources below.
A personal judgment against a mortgagor for the amount by which the foreclosure sale price falls short of the secured obligation. The judgment is available to the mortgagee unless limited or abolished by statute. State law governs whether and to what extent the mortgagee may recover the shortfall after applying sale proceeds to the debt.
Deanna Davenport borrowed from Dover Bank and gave a mortgage on her commercial building. After default Dover Bank foreclosed and the property sold at auction for less than the remaining loan balance plus costs. Dover Bank then sued Deanna for the difference between the sale price and the debt.
Derek Douglas gave a mortgage on his home to secure a loan. During an economic emergency a state statute temporarily barred deficiency judgments after foreclosure sales. The lender foreclosed and the sale price left a shortfall, but the statute prevented the lender from obtaining a personal judgment against Derek for the unpaid balance.
The Blaisdells executed a mortgage on their property in Minneapolis to the Home Building & Loan Association on August 1, 1928. The mortgage contained a valid power of sale by advertisement. After default, the mortgage was foreclosed and the property sold to the Association on May 2, 1932, for $3700.98. The period of redemption under the law then in effect was set to expire on May 2, 1933. On April 18, 1933, Minnesota enacted Chapter 339 of the Laws of 1933, known as the Mortgage Moratorium Law. The statute authorized district courts to extend the period of redemption from foreclosure sales for such additional time as the court deemed just and equitable, not beyond May 1, 1935, upon condition that the mortgagor pay a reasonable part of the income or rental value toward taxes, insurance, interest, and principal. The Blaisdells applied to the District Court of Hennepin County for an extension of the redemption period. The district court found that the reasonable rental value of the property was $40 per month and the present market value was $6000. It extended the redemption period to May 1, 1935, requiring the Blaisdells to pay $40 per month to the Association. The Supreme Court of Minnesota affirmed the order. The Home Building & Loan Association appealed to the United States Supreme Court, which reviewed the judgment sustaining the statute as applied to the preexisting mortgage.
View caseA mortgagee may obtain a deficiency judgment when the foreclosure sale price is less than the mortgage obligation. The judgment is for the difference between the obligation and the sale price, subject to any fair-market-value adjustment required by statute.
The original borrower remains personally liable on the note unless released by the lender. An assumption by the buyer creates additional liability for the buyer but does not automatically discharge the original borrower from deficiency exposure after foreclosure.
Some states prohibit deficiency judgments after foreclosure of purchase-money mortgages or after power-of-sale foreclosures. Other states require that the deficiency be calculated using the property's fair market value when that value exceeds the sale price.
Any surplus after payment of sale costs and the foreclosed debt is distributed first to junior lienholders in order of priority and then to the mortgagor. The same priority rules apply whether a deficiency or a surplus results from the sale.