Know if your lenders can sue after a foreclosure

Foreclosure sign outside house

It all depends on whether you live in a "recourse" or "nonrecourse" state.

In a recourse state, borrowers are required to repay lenders for any losses they incur in a foreclosure.

Let's say you owe $200,000 on your primary mortgage, but the bank can only sell the home for $175,000 and spends $15,000 on repairs, taxes and other expenses. It can sue you for $40,000.

In nonrecourse states, lenders can't recoup those losses.

Be aware that the rules for first mortgages can be different from those for second mortgages, including home equity loans.

"In some states, although the first loan may be nonrecourse, the lenders of home equity or second loans may have relief through recourse actions," says Joe Russo, author of Selling Your House/Condo in this Housing Emergency of 2008.

If you're at risk, you also need to know whether the recourse laws limit the assets lenders can seize. In some states, for example, banks are not allowed to demand repayment from your retirement accounts, such as a 401(k) or IRA.

The best way to estimate your exposure is to ask your credit counselor or lawyer. You also can call your state's attorney general or bar association.

Even if you live in a recourse state, the odds of a bank coming after you are low. Most families losing their home don't have enough money to make a lawsuit worthwhile.