If you're facing a foreclosure or short sale, very little seems worse than the prospect of losing your home to your mortgage lender. Unfortunately, many former homeowners may be in for a particularly nasty surprise. Banks often have the right to file a lawsuit for a mortgage deficiency judgment and continue to pursue borrowers for their unpaid mortgage debts.

How a Mortgage Deficiency Occurs

After a foreclosure, the mortgage lender will attempt to sell the property either at a foreclosure auction or on the open market. If the price the lender gets for the home is less than the amount of money theyou owed on your mortgage loan, you're still legally responsible for the difference.

Short sales are even more dangerous. In some cases, a homeowner who loses his home to foreclosure has built sufficient equity in the house to allow the mortgage lender to recover the full outstanding mortgage balance. This is never true of a short sale. The very basis of a short sale is the fact that the lender agrees to allow you to sell your home for less than you owe on your mortgage loan. Thus, short sales always create a mortgage deficiency. In certain circumstances, a forgiven mortgage deficiency may carry a tax penalty.

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