Deficiency Judgments
Homeowners who sell their homes "short" need to understand whether the lender will release them from all liability with regard to any deficiency.
You can see a quick YouTube video on this by clicking here!
In a short sale the lender discounts the debt, releases their lien on the property and then receives a short payoff. Homeowners who sell short typically ask: Will I be required to pay some or all of the deficiency? Will the lender release me of liabilty? Will the lender sue me after the short sale to recover the deficiency?
This topic may appear complex. Here are a few simple things to consider.
First, the good: Purchase Money Loans (PML). A PML is a loan that was put on the home the day it was purchased by an owner occupant. General rule: In CA, a lender must look to the home for repayment of the debt, and there is no personal liablity for such a loan.
The bad: Refinance loans - recourse debt. Non purchase money notes or refinance loans carry with them the potential for personal liablity. In these cases sometimes the lender will release the lien for the purposes of the short sale, but not release the liaiblity. Many lenders use language such as "we retain the right to pursue the deficiency under the laws of your state". In this case there may be ongoing liability for the remaining balance. Some lenders, especially second lenders, after a short sale, are contacting borrowers and attempting to collect on the deficiency. There are lenders, however, who are forgiving the debt and releasing liability. We handle every individually and work very hard to get homeowners the best possbile outcome.
Many lenders will negotiate before the short sale to settle the debt. Some will not.
Whether purchase money or non purchase money notes, however, lenders often ask borrowers to pay cash or sign a note before approving the short sale. Second lien holders are more likely to ask for contributions, particualry when the loan is a large second - $100K and up.
Per Supplemental Directive 09-09, to be effective April of 2010, all lien holders who participate in the Government's HAFA program are required to release borrowers from any deficiency. Will they? We will see. Lenders in the past have not always been willing to comply with Government directives in this area. We are following this issue closely. Contact us for the latest update.
