Deficiency Judgments

A lot of homeowners have questioned what happens after a short sale and in particular the possibility of their lender filing a deficiency judgment against them.
While the State of Minnesota may be considered a deficiency judgment free state, it's important to understand the facts regarding this statement.


It is widely assumed that if you let the home go through foreclosure that you are free from receiving this deficiency judgment down the line since the bank was able to recover a portion of their loss through the sale of the bank owned home. This is, in part, true within Minnesota so long as the foreclosure is conducted by advertisement with a redemption period. https://www.revisor.mn.gov/statutes/?id=582.30
The negative side to this aspect is that of the second mortgage. Second mortgages are governed by different laws and those lenders can file a deficiency judgment for the entire balance of the second mortgage or even the balance of the loan that was ‘dismissed’ with the short sale acceptance.


Selling your home as a short sale does not erase the possibility of your first mortgage filing said deficiency judgment. It's important to be aware of this fact and request certain language be inputted into the short sale approval letter to protect yourself in the future.
A statement to protect the mortgagor could be as follows:
“Only upon receipt of certified funds and the final HUD-1 Settlement statement, will XYZ mortgage release its mortgage on the property and waive any deficiency against John Doe.”
Request this language in the hardship letter as well as the intro letter your realtor submits with the short sale package once an offer is received.
i.e. “Please accept this offer as payment in full and waive your right to deficiency against me/us”

Most lenders already have this language detailed in the letter. If it is not, you can negotiate this verbiage at the same time of negotiating the short sale offer of which can also be negotiated into the second mortgage's approval letter as well.

Please be sure to consult an attorney when considering your options of short sales and foreclosures to determine your best course of action considering your financial sitaution and future goals.