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Deficiency Judgment After Successful Short Sale

New Jersey being a “recourse loan” state, lenders have the right to pursue all legal collection actions for the borrower, even if they move out of state. One of these legal actions is the deficiency judgment: the request of lender against a borrower, for the amount not covered by the sale of the property.

Although deficiency judgments are normally only filed in case of a foreclosure, mortgage companies can sometimes demand one in an effective short sale. This means that the homeowner still owes the lender for the difference between what the house was sold for and the amount of the original loan. This can be explained by the fact that lenders often agree to a short sale to escape the costs of maintaining a property post foreclosure but they suffer a shortage in the process since the house is sold for less than is owed by the borrower.

If a homeowner is requesting a short sale because he/she is financially unable to pay their mortgage, experts in  New Jersey real estate law can map out some easy precautions to escape a deficiency judgment, such as the short sale clause.

New Jersey’s Fair Market Credit doctrine

While New Jersey permits deficiency judgments against homeowners, it also has a “Fair Market Credit” doctrine, which protects borrowers from being unfairly haunted by their lenders. This doctrine, set forth under N.J.S.A 2A: 50-3, allows lenders to come after you for the difference between the auction sale price and the market value of the home at the time of the sale. This means that in the event of a deficiency judgment the homeowner will no longer owe the amount between what the property sold for and the original loan. This protects the borrower from having to pay a windfall in case the property was sold for a low price.

The Fair Market Credit doctrine is only a defense to be raised by the borrower in a deficiency proceeding. New HAFA policy & Unavailability of deficiency judgment According to the Home Affordable Foreclosure Alternatives (HAFA) program guidelines released by the Federal Housing Finance Agency (FHFA), homeowners who are Fannie Mae or Freddie Mac borrowers and have achieved a successful short sale cannot be pursued by a deficiency judgment. In other words, these mortgage companies have no legal collecting venues against borrowers after a successful short sale.

Avoiding deficiency judgment

When negotiating the terms of a short sale, homeowners in the New Jersey state should have a Burlington County real estate attorney prepare and review their documents, explaining how they are able to avoid a deficiency judgment.