The fate of the former owner varies from state to state.
In some, the auction purchaser, whether it is the lender or a third party, sends notice that the former owner must vacate the premises. If the former owner does not surrender possession within the legal time limits, he or she could lose valuable rights to buy back the property at a later date.
Other states allow the former owner to occupy the foreclosed property for up to one year. Still other states take the position that a foreclosure is the end of everything for the former owner. He or she has no right of occupancy, no right to buy the property back, and no right to reverse the foreclosure, even if it was wrongful. The former owner’s sole remedy is to sue the lender for money damages.
Make sure you know the rules of your particular state before purchasing a foreclosure property. The different rules could make a dramatic difference in your decision making. Appendix C provides a good overview of state laws and also gives resources for more information.
Another postforeclosure issue has to do with deficiency judgments. What happens when the property is worth less than the outstanding balance on the loan? There are two possibilities.
1. The lender may obtain a deficiency judgment against the borrower for the remaining balance on the loan. This is the same as any other judgment. It can be collected by the seizure of other assets, the garnishment of wages, or the garnishment of bank accounts.
2. The lender is not allowed to obtain a deficiency judgment, but must be satisfied with the real estate alone.
The rules differ among states, and also according to the actual loan agreements between the lender and borrower.
When a lender agrees up front that it will look to the real estate for its recovery in the event of a default and the borrower will have no personal liability, it is called nonrecourse lending. Even in states that allow deficiency judgments, a nonrecourse loan agreement protects the borrower against any further liability.