Iowa foreclosure laws generally allow deficiency judgments. However, the state has several anti-deficiency laws prohibiting deficiency judgments in certain circumstances.
How Iowa Foreclosures Work
Iowa foreclosures are typically judicial, which means they go through the state court system. The bank officially starts the foreclosure by filing a petition (a lawsuit) and serving it on the borrower.
If the borrower doesn’t respond to the lawsuit, the bank automatically wins by default and receives a foreclosure judgment from the court, allowing it to sell the home. However, if the borrower files a response to the suit, the court will decide who wins the case. If the bank wins, the court orders a foreclosure sale.
At the foreclosure sale, the bank is usually the only bidder for the property. The bank makes a "credit bid," meaning it bids the unpaid debt owed. Certain banks have a policy of bidding the full amount of the debt. Other banks bid a lesser amount.
A “deficiency” happens when the bank (or a third party) buys the home at the foreclosure sale for less than the borrower owes. The difference between the sale price and the debt is the "deficiency."
What Is a Deficiency Judgment?
Some states allow a foreclosing bank to get a deficiency judgment (a personal judgment) against the borrower for the amount of the deficiency balance.
Once a bank gets a deficiency judgment, it can use common collections methods to collect the deficiency from the borrower by, for example, garnishing wages or levying a bank account.
How to Calculate the Deficiency Amount in Iowa
Suppose Michael falls behind in his mortgage payments for his Des Moines home, and the bank chooses to foreclose. At the foreclosure sale, the bank buys the home for $400,000. However, Michael owes the bank $450,000. The deficiency in Michael's case is $50,000.
Do Foreclosure Sales Always Result in a Deficiency?
There's no deficiency if the sale price equals or exceeds the mortgage debt amount. In fact, if the sale results in surplus funds (more than what's needed to pay off any other liens, like a second mortgage or HELOC), you might be entitled to that extra money following the foreclosure sale.
Are Deficiency Judgments After a Home Foreclosure Allowed in All the States?
Some states have anti-deficiency laws prohibiting deficiency judgments after foreclosure in certain circumstances.
Does Iowa Allow Deficiency Judgments?
Yes. However, Iowa has several anti-deficiency laws, which prohibit deficiency judgments in some situations.
How Deficiency Judgments Work in Iowa
While Iowa generally allows a foreclosing bank to get a deficiency judgment, state law prohibits this kind of judgment in specific circumstances. The foreclosing bank can’t get a deficiency judgment in any of the following scenarios.
- The mortgage contract reduces the redemption period, the bank gives up (waives) its right to a deficiency judgment in the foreclosure action, and the property is less than ten acres. (Iowa Code § 628.26),
- The bank elects to foreclose without redemption and gives up its right to obtain a deficiency judgment in the foreclosure petition. (Iowa Code § 654.26).
- The bank forecloses without redemption and doesn’t waive a deficiency in the lawsuit, but the borrower doesn’t request a delay of the foreclosure sale, and the property is a one- or two-family primary residence. (Iowa Code § 654.26).
- A deficiency judgment isn't allowed if the foreclosure is an involuntary nonjudicial foreclosure of a nonagricultural mortgage. This kind of foreclosure can't be used for real estate used for an agricultural purpose or a one- or two-family dwelling which is, at the time of the initiation of the foreclosure, occupied by a legal or equitable titleholder. (Iowa Code § 655A.3).
- Iowa law also prohibits the bank from getting a deficiency judgment if the bank agrees to an alternative nonjudicial voluntary foreclosure. When agreeing to give up the home in this type of foreclosure, the borrower doesn't get the right to redeem the home. (Iowa Code § 654.18).
The bottom line is that Iowa law makes it faster to foreclose on a property if the lender waives the right to a deficiency judgment.
How Can I Avoid a Deficiency Judgment?
If the bank retains the right to get a deficiency judgment, a few ways to potentially avoid one are:
- Negotiating a settlement of a deficiency. If you lost your home to a foreclosure sale, which resulted in a deficiency, you might be able to work out a settlement with the bank to accept less than the full deficiency amount and forgive the rest. Generally, however, the IRS considers forgiven debt as taxable income, subject to some exceptions.
- Completing a short sale or deed in lieu of foreclosure (before the sale) in which the bank waives the deficiency. If you owe more than your home is worth, the bank might be willing to let you complete a short sale or deed in lieu of foreclosure. But it’s fairly common for banks to insist borrowers pay all or some of the deficiency after one of these transactions or for the bank to reserve the right to go after you for a deficiency judgment. If you're doing a short sale or deed in lieu for the sole purpose of avoiding a deficiency judgment, make sure that the bank agrees in writing to give up its right to the deficiency. Again, there could be tax consequences if the bank forgives the deficiency.
- Filing for bankruptcy. You might be able to eliminate or reduce your liability for a deficiency if you file for bankruptcy.
Getting Help
Foreclosure law in Iowa is complicated. If you have questions about the foreclosure process or whether you might have to pay a deficiency judgment after a foreclosure, consider talking to a local foreclosure attorney. A foreclosure attorney can also explain any defenses to a foreclosure that you might have and explain different ways to avoid a foreclosure, like with a modification.
If you can’t afford to consult with a lawyer, a HUD-approved housing counselor might be able to help you arrange an alternative to foreclosure.