A borrower who lives in a recourse state buys a house for $275,000 and takes out

Question

A borrower who lives in a recourse state buys a house for $275,000 and takes out a loan for $250,000 (senior mortgage) to finance this purchase. A few years after the original purchase, the outstanding loan balance is now $240,000 but the property value has declined and this borrower defaults on the loan and the property is sold in a foreclosure sale for $220,000. Can the lender seek a deficiency judgment against this borrower? If so, for how much?

Yes, $20,000

Yes, $25,000

Yes, $35,000

No, the lender may not seek a judgment.

Explanation / Answer

Since the borrower resides in a recourse state and has defaulted on his outstanding loan balance of $240,000, the lender can seek a deficiency judgement against the borrower.

In case of the deficiency judgement, the lender can seek for an amount of difference of the outstanding loan balance and the value of the underlying property. The difference in this case is ($240,000 - $220,000) = $20,000.

Thus, the answer to the question is A (Yes, $20,000).

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