FAQ's on Mortgage Deficiencies

Q: What is a mortgage deficiency?
A: A mortgage deficiency is the difference between what is owed on a mortgage and the value of the home securing the mortgage. If a mortgaged property is sold and the sale proceeds are not sufficient to pay off the mortgage, then a deficiency exists.

Q: Is the homeowner responsible for a mortgage deficiency?
A: Absolutely. If a property is foreclosed on, or the homeowner does not achieve the best terms in a short sale, then the homeowner is responsible for the mortgage deficiency. Failure to pay the monies owed is breach of contract.

Q: Can the lender sue the homeowner for a mortgage deficiency?
A: Absolutely. Failing to pay monies owed on a mortgage, even after a foreclosure, constitutes breach of contract under Nevada law, and the lender can, and often will, sue the homeowner for the deficiency.

Q: What is the statute of limitations on a mortgage deficiency?
A: Any type of action has a time limit for when action must be taken. This time limit varies depending on the type of case. In Nevada, the statute of limitations for breach of contract is 6 years pursuant to NRS 11.190(1)(b). However, following a completed foreclosure, NRS 40.455(1) provides a 6 month statute of limitations. So if a lender chooses to foreclose and completes the foreclosure, they only have six months to sue the homeowner for any deficiency. If a deficiency exists for any reason other than a completed foreclosure, such as that on a non-foreclosing second mortgage, or following a short sale or deed-in-lieu, the lender has the normal 6 year statute of limitations.

Q: Can a deficiency be avoided?
A: Yes. It is typically the lender's prerogative how they proceed if there is a deficiency. However, if the case is handled correctly from the beginning, a deficiency can often be avoided. Unfortunately, homeowners who try to handle these issues themselves often make irreparable mistakes when giving information on the phone (they are recorded!) or in submitting documents. This is why it is imperative to hire an attorney who can professionally manage a loan modification, short-sale or bankruptcy.

Q: Are there tax implications to a mortgage deficiency?
A: Yes. Again, it is the lender's prerogative whether or not they choose to pursue the homeowner on a deficiency. The lender can choose to forgive the deficiency. If the lender chooses to forgive the deficiency, they will issue the homeowner a 1099 for the amount of the deficiency, and the forgiven amount can be, and often is, taxable income.