Bad new, my friends: A lender isn’t the only entity that can pursue a deficiency judgment in the case of a
foreclosure. Your private mortgage insurance provider can seek a judgment against you too - even if the
lender has agreed not to pursue it.
Here’s how it works: You’re the owner of an underwater property, and you decide to just walk away
because you believe your equity will never catch up to your debt. You talk with your lender and agree to
give them a deed in lieu of foreclosure, and in return, the lender agrees not to pursue a deficiency
judgment.
Beware of
Deficiency
Judgments
For the new investors among us, a “deficiency judgment” is little more than a court-ordered requirement
for you to pay back a lender for the amount of their losses on a loan Example: You owe $300,000 on
a property that is foreclosed. The lender sells it for $250,000, leaving a $50,000 deficiency. A
“deficiency judgment” happens when a court issues a judgment that requires you to pay the deficiency back to
the lender to cover the shortage.
The problem is that the lender isn’t the only party in the transaction. If you purchased your home
with a loan that required private mortgage insurance, it’s entirely possible that your mortgage insurer could
pursue you for the amount of the deficiency, since the mortgage insurer is likely to be forced to bear at least
some of the expense of the loan losses.
So before you, or your clients, take great comfort in having a lender agree not to pursue a deficiency
judgment, keep in mind that a borrower could face the threat of a deficiency judgment from a mortgage insurer
despite what a lender might say.
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