New York Real Estate Salesperson ExaminationFinancingMedium
A homeowner has defaulted on their mortgage, and the lender has initiated foreclosure proceedings. After the property is sold at a public auction, the sale proceeds are insufficient to cover the outstanding mortgage balance and all associated costs. What legal action might the lender pursue to recover the remaining debt?
- AA deficiency judgment.
- BA short sale agreement.
- CA redemption period.
- DA deed in lieu of foreclosure.
Show answer & explanationAnswer & explanation
Correct answer: A. A deficiency judgment.
When a foreclosure sale does not generate enough funds to cover the entire outstanding debt, the lender may seek a deficiency judgment against the borrower to recover the difference. This judgment allows the lender to pursue other assets of the borrower.
Why the other options are wrong
- B. A short sale agreement is an arrangement where the lender agrees to accept less than the full amount owed on the mortgage to avoid foreclosure.
- C. A redemption period (right of redemption) allows the borrower to reclaim the property by paying the full debt, typically before or shortly after the foreclosure sale.
- D. A deed in lieu of foreclosure is an alternative to foreclosure where the borrower voluntarily transfers the deed to the lender, avoiding a public sale.
Deficiency Judgment
A court order that allows a lender to collect the remaining balance of a debt from a borrower when the proceeds from a foreclosure sale are insufficient to cover the entire loan amount.
- Occurs after a foreclosure sale.
- Lender sues the borrower for the unpaid balance.
- Not permitted in all states or for all loan types.
Memory trick: If the sale falls short, the lender can still sue for the 'deficiency' amount.