Texas is a recourse state. This means that mortgage lenders can seek a mortgage deficiency judgment against a borrower when the proceeds of a foreclosure sale do not pay off the entire balance of a mortgage. However, Texas has some limitations in place as to how much can be collected from the homeowner.
Foreclosure sales take place on the first Tuesday of each month. They are in the form of an auction, with the highest bid taking the property. Once a property is sold, the proceeds are applied to the balance of the mortgage. If the sale price pays off the mortgage balance then the remaining amount of the proceeds are paid to the borrower, assuming there are no other liens against the property. When the sale price does not pay off the entire balance of the mortgage then the lender can seek a mortgage deficiency against the borrower and collect from them personally, but with one limitation.
In Texas, the borrower can only seek a mortgage deficiency judgment for the difference between the actual value of the property and the mortgage balance. So if the sale price is less that the fair market value of the property, then the lender will not be able to get a mortgage deficiency judgment for the entire amount owed to them. For example, a house worth $200,000 is foreclosed and the sale price is $150,000. The balance on the mortgage is $225,000. The remaining balance of the mortgage loan is $75,000, but the lender will only be able to collect $25,000, which is the difference between the value of the property and the balance on the mortgage.
Texas properties haven’t dropped as much as they have in many states, so the way deficiency judgments are calculated is very important. The stability in the housing market in Texas has prevented many foreclosed properties from resulting in mortgage deficiencies. There are lots of foreclosures in Texas, but since housing values haven’t dropped much there are not many mortgage deficiencies.