California Real Estate Practice Exam

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What can a lender do if the foreclosure sale of a house does not cover the amount of the mortgage?

Accept the loss
Transfer the debt
Negotiate a new loan
Sue for a deficiency judgment

The correct answer is: Sue for a deficiency judgment

When a lender forecloses on a house, they are able to sell the house at a public auction to recoup the amount of the mortgage that is owed. However, if the sale does not cover the full amount of the mortgage, the lender may still go after the borrower for the remaining balance. This is known as a deficiency judgment and it allows the lender to file a lawsuit against the borrower to collect the outstanding debt. Accepting the loss (option A) would simply mean the lender giving up on trying to collect the remaining balance. Transferring the debt (option B) would just shift the responsibility to another party, not solve the issue of the deficient amount. Negotiating a new loan (option C) would also not address the issue as it would create a new debt without resolving the existing one. Therefore, the most appropriate action for the lender in this scenario is to sue for a deficiency judgment (option D).