Deficiencies and You: How to Protect Yourself in a Down Real Estate Market

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February 21, 2011

In today’s depressed real estate market, it is wise to keep yourself informed of the consequences of possible deficiencies on loans on your home. A deficiency is the difference between what you owe on your house and what it can be sold for, whether on the market or at a foreclosure sale. No matter if brought about by a short sale, foreclosure, or in connection with the dissolution of your marriage, deficiencies can have a serious impact on your financial future.

Deficiencies can occur as the result of purchasing a home at the peak of market value and needing to sell for a lower price that does not cover what is owed on the home, as many homeowners are currently experiencing. The amount owing on your home may be brought about by encumbrances, known as purchase money mortgages, home equity lines of credit (HELOCs), second mortgages, or seller financing, and are generally in the form of a trust deed. A trust deed is document that transfers title of real property to a trustee, who holds it as collateral for a loan.

Oregon state law contains provisions that protect personal residences in the case of a deficiency. However, these statutes may not be sufficient to protect you in regard to all of the encumbrances that may be against your house. It may be necessary for you to take certain measures to protect yourself. As part of a short sale, it is important to get a release from your lenders as to any possible deficiencies. If you do not, the lender may hold you responsible for the deficiency amount if the loan is not completely paid out of the sale proceeds.

In a foreclosure scenario, you will be protected against certain deficiencies only if your house retains its character as residential. If you are not living in your house when foreclosure proceedings begin, the lender will be entitled to a deficiency judgment in a judicial foreclosure proceeding and may seek to garnish your wages or salary, or go after your other assets to collect the deficiency judgment.

When deciding on division of property in a divorce, it is important to consult with an attorney knowledgeable in the area of residential trust deeds to ensure that you receive the maximum protection possible if you are to take title to the family residence and assume the associated obligations.

In certain cases, lenders are suing on the money loaned to you rather than foreclosing on the property. Although this happens infrequently, it is important to consult with a real estate attorney in such an event.