Real Estate Mailbag: Who pays loan balance if house sells for less?

QUESTION:If your home is foreclosed on by your mortgage lender: Will the lender go after you if the house sells for less than you owed? And, if there are two loans on your house, what is the role of the second mortgage (trust) holder?

ANSWER: Your first question involves what is known as a “deficiency.” If, for example, you owe the lender $150,000, but the home sells at the foreclosure sale for $125,000, there is a deficiency of $25,000. Some lenders, when they pursue foreclosure, will start the bidding process at the amount of the outstanding balance, while others will set a minimum bid at less than the balance.

Some states do not allow the lender to go after you for the deficiency, while other states do. You have to get the answer about your state from a local attorney.

You also asked about the role of a second trust lender. In general, if the first trust holder forecloses, it wipes out the security of the second lender. On the other hand, if the second lender forecloses, anyone who buys at the foreclosure sale takes ownership subject to the first mortgage. In other words, the buyer steps into the shoes of the homeowner who was foreclosed upon and owes the money on the first trust.

But even if the second trust holder’s security (the deed of trust or mortgage document) is wiped out, you are still obligated to pay that lender.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. Questions for this column can be submitted to benny@inman.com .