by Doreen Martel

Created on: November 15, 2011   Last Updated: November 17, 2011

Texas foreclosures are governed by Texas property code section 51.003 and state that lenders are able to secure a deficiency judgment against homeowners who have been foreclosed. Deficiency judgments are the difference between the amount of money owed to the lender and the amount of money the lender received from the sale of the property. However, for homeowners who want to know how to avoid paying a deficiency judgment in Texas, there are some options available.

Short sale

Short sales can occur after a lender has filed a foreclosure request with the Texas courts.  Homeowners can arrange for the sale of the property to a third party for an amount that is agreed to between the homeowner and the lender. Lenders are often reluctant to accept a short sale since this negates their ability to file for a deficiency judgment.

Deed in lieu of foreclosure

Lenders may accept the deed to the property in lieu of foreclosing on the property. In this process, the homeowner (borrower) agrees to sign the property back to the lender without the formalities of a foreclosure sale. In this instance, the lender is then unable to sue the homeowner for a deficiency.

Deficiency limitations

While most states that allow lenders to file a deficiency judgment request, Texas law is very specific about this process. For example, in most states a homeowner would face a deficiency judgment based on the difference between the foreclosure sale price and the amount owed to the lender. In Texas however, the lender may only collect a deficiency based on the fair market value of the property and the amount owed.

The deficiency would work in the following manner:

Foreclosure Sale Price:  $150,000
Mortgage Outstanding: $200,000
Fair Market Value:         $175,000

In this case, the deficiency judgment could not be more than $25,000. Other states may allow the lender to sue for $50,000, but Texas does not allow this to occur. In addition, if the lender has received any payment from a personal mortgage insurance policy (PMI) the amount they receive must be credited before a deficiency judgment can be requested.

Approximately one in every 985 homeowners in Texas are currently facing foreclosure. Understanding how to avoid paying a deficiency judgment in Texas may help homeowners get out from underneath an upside down mortgage without owing additional money after the foreclosure process is complete. Homeowners who are facing foreclosure should contact their lender regarding some of the options such as short sales and deed in lieu of foreclosure.  This could prevent a bad situation from getting even worse.

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