California Short Sale & Deficiency Balance
- A short sale is the sale of property for less than the balance of the mortgage.
- Review California's intricate short sale rules.
- Homeowners in California can sacrifice certain rights when they refinance.
If I let my California home go into foreclosure, can the lender collect any deficiency balance from me?
If I refinanced my owner occupied home and I sell it in a short sale, because this is a recourse loan, the lender can come after me. If I let it go into foreclosure, can the lender still come after me? I reside in California.
Allow me to define a short sale. A short sale is where a mortgagee (most likely a bank) agrees to the sale of a property for less than the balance of the loan. The new owner may not be liable for what is known as the "deficiency balance." Some banks do not forgive the deficiency balance, and others do. See the Bills.com resource How to Short Sale to learn more about short sales. Editor's note: California SB 931, which was signed into law September 30, 2010, outlaws a deficiency judgment under a note secured by a first deed of trust or first mortgage for a short sale. SB 458, passed into law in mid-2011, changed CCP 580e to not allow the collection of deficiency balances for all notes secured by mortgages or deeds of trust in a short sale situation.
Banks that participate in the Home Affordable Foreclosure Alternatives (HAFA) program may not collect a deficiency balance from former owners.
Refinancing a purchase money loan removes the California anti-deficiency protection. However, if you short sale the property and as mentioned above, your bank is not participating in HAFA, it may collect any deficiency balance. See the Bills.com resource California Deficiency Balance and Is My HELOC a Recourse or Non-Recourse Loan in California? to learn more about the nuances of California's anti-deficiency rules.
You mentioned foreclosure. Foreclosure is the legal process through which a lender (most typically a mortgage lender) claims an asset from the consumer borrower who has defaulted on their mortgage payments. Because foreclosure is expensive and usually results in a poor return, lenders do not like foreclosure any more than homeowners do. See the Bills.com resource Mortgage Foreclosure California to learn more about California's rules regarding foreclosure.
You have personal liability for a deficiency balance. This means that even if there is a foreclosure you must pay the difference between the auction price and the balance of the loan.
One final thought. You may face a California state income tax liability for a short sale. See the Franchise Tax Board documents Foreclosure and Short Sale and How Do I Report a Short Sale and Mortgage Forgiveness Debt Relief Extended for discussions of the tax implications.
I hope this information helps you Find. Learn & Save.
Under California statute and case law, purchase money loan(s) are included in the state's anti-deficiency law in the event of a foreclosure. In other words, as long as a homeowner doesn't refinance, lenders may not pursue the homeowner for a deficiency balance on purchase money loans in the event of a foreclosure. This includes 80/20 loans that are not refinanced.
Under a relatively new addition to California law, lenders cannot pursue a homeowner for a deficiency balance if he or she signs a short sale contract. This law does not exclude refinanced loans.
What does this mean to you? You mentioned you never refinanced the Central Valley home. If so, you can either walk away and allow a foreclosure, or short sell the property, and the lender cannot pursue you for the deficiency balance. My advice? First, talk to a lawyer to make sure my analysis here is correct. Second, ask the lender about a short sale? Why a short sale if the end result is the same, regarding liability for the deficiency balance? Short sales cause slightly less damage to your credit score, and you will qualify for a mortgage refinance sooner if you short sell the property. In other words, a short sale will give you more options sooner if you want to qualify for a new loan.