Calculating Deficiency

What Is A Potential Deficiency and how is it calculated?

A potential deficiency is the difference between the value of a piece of property and the principal balance of the mortgage loan associated with that property. It is only possible to estimate the amount of a potential deficiency, as values fluctuate. If a piece of property is worth less than the loan balance, there is a potential deficiency; if worth more, there is no potential deficiency. This estimate is useful to a homeowner because it helps identify potential liabilities. A home that is worth less than the loan balance presents a financial risk and may also represent a bad investment. Estimating a potential deficiency gives homeowners more of a stake in what happens.

A deficiency cannot be fully determined until a property is sold at a foreclosure sale.   The amount of the winning bid is the new value of the property.  The judgment amount will include the difference between the new value and the loan remaining plus fees and penalties incurred before and during the foreclosure lawsuit.  These may include late fees, attorney’s fees, property inspection, maintenance and hazard insurance fees and property taxes.  This amount will be specified in the judgment of foreclosure and sale and is known as the judgment amount. When the judgment amount exceeds the value of the property, then there is a deficiency. Maryland, as I wrote in this blog,  just enacted a new law requiring that deficiency judgments be filed within three years of the foreclosure sale.

As an example, if the judgment amount is $100,000, but the home sells for $60,000 at the sale, then the deficiency is $40,000.  The lender can pursue you for that deficiency if they so choose.


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