Definition
When a property forecloses for less than the mortgage balance, a deficiency judgment allows lenders to pursue you personally for the shortfall. In non-recourse states, lenders can't do this on purchase-money mortgages, protecting you from personal liability. State laws vary significantly.
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When a property is foreclosed and the sale price is less than the mortgage balance, the lender has a deficiency. In judicial foreclosure states, lenders can seek a deficiency judgment allowing them to collect the shortfall from the borrower's personal assets. Non-recourse states don't allow deficiency judgments on purchase-money mortgages (mortgages used to purchase the home), protecting borrowers from personal liability. Some states limit deficiency rights or require strict procedures. Deficiency judgments are collected through wage garnishment, bank levies, or liens on other property.
Pro Tip
Understand your state's deficiency laws before purchasing; non-recourse states offer more protection in case of foreclosure.
Example
A home forecloses with a $400,000 mortgage; the property sells for $320,000. The lender obtains a $80,000 deficiency judgment against the borrower, allowing collection from future wages.