As was covered in another F&M’s post, in California purchase money loans on primary residences are considered non-recourse which means that in certain instances, the only thing a lender can do to a nonpaying borrower is take the home, and that borrower faces no personal liability for the debt. However, many California homeowners have taken cash out of their homes through refinancing and home equity lines of credit. Such cash-out borrowers do not enjoy complete immunity from personal liability.
California law also provides that, in certain circumstances, a foreclosing lender cannot hold a homeowner personally liable for the debt after foreclosure. A short sale is not a foreclosure. Thus, personal liability for a debt may exist when a home does not foreclose but instead goes to through short sale.
In a short sale, a homeowner may face personal liability for the difference between the sale price and the sale price. Because brokers and agents get paid only if a sale goes through, these persons may not provide unbiased advice as to whether a short sale is in the best interests of a cash-out borrower. The problem gets more complex when there is are 2 or even 3 loans on a home, or the property is commercial.
The foreclosure process in California generally takes no less than 6 months from the first missed payment. Thus, a homeowner can potentially be forced to move about 6 months after failing to pay. However, it can take 3, or even 4, months for a lender to approve a short sale. Thus, if a purchase offer is made 5 months into foreclosure, and the lender takes 3 months to approve the sale and another month to close, the nonpaying homeowner may get to stay in their home for a total of 9 months without paying the mortgage, property taxes, or insurance.
To be clear, lenders get a benefit from short sale as homes sold at short sale often net the lender more than a bank-owned property sale. Bank-owned properties drive down prices in entire neighborhoods because they are often run-down and have brown lawns. Thus, the banks can benefit through short sales as opposed to foreclosure.
An unbiased opinion as well as solid advice about the advantages and disadvantages of short sale versus foreclosure can be obtained from a knowledgeable and experienced real estate attorney. Because attorneys are paid hourly, their advice can be considered unbiased as opposed to people who are paid only “when the deal closes.” If a foreclosure, but not a short sale, would eliminate personal liability, the homeowner needs such information to make the right choice.
When dealing with potential liability for hundreds of thousands of dollars, the price of an hourly consultation with a local attorney is a great investment.