As a result of not getting the right legal advice in advance, Deficiency judgments pop up sometimes after a short sale or a foreclosure. This surprises many homeowners.
Promissory Notes and Mortgages
Deficiency judgments are actually from promissory notes, this is a note that promises to pay a loan or any money borrowed. It also creates personal liability, depending on a state’s particular law. Personal liability is when a lender can go after the borrower’s assets when failed to pay the debt.
When a promissory note has been used to pay and yet, still failed to pay off debts, the lender or the beneficiary of the promissory note has the right to foreclose the property. The property stands as the security of the promissory note.
This is the common cases that happen when you fail to pay your mortgage, the bank will take hold of your property and can sell it to an open market to hopefully get more money from its sale.
When a house foreclosure is pending, a short sale may be one of the best options to alleviate your problems or concerns, it is better than nothing or a foreclosure.
A deficiency is a difference between the principal balance due and the amount received, giving the amount received is less than the amount borrowed.
Deficiency Judgments in California
In California, borrowers are all purchase-money loans on a one- to a four-unit residential dwelling that is excluded from deficiency judgments.
Hard-money loans in California — loans taken out after the home was purchased through a second mortgage or refinance — can be subject to a deficiency judgment under the following conditions:
- The lender forecloses under judicial proceedings (California Code Civil. Proc. § 726).
- Most lenders foreclose through a trustee’s sale, which doesn’t give the lender the right to pursue a deficiency judgment with one exception (see second hard-money second mortgages below).
- A three-month limit applies to actions for deficiency judgments under a judicial foreclosure.
- If the second mortgage is hard money and the lender has lost security for that loan through a foreclosure or short sale — making the security for the promissory note worth nothing — the beneficiary of that second mortgage can pursue a deficiency judgment (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).
- SB 931, effective Jan. 1, 2011, offers deficiency protection to California’s short sellers if the loan is in the first position. It does not apply to foreclosures.
Hard money lenders in some cases sell a promissory note to an investor after a foreclosure. The investor will eventually collect the debt. A short sale seller like our readers may believe that the deal has ended until one day he will be called and asked for repayment. If this happens:
- The lender will negotiate for a discounted payment.
- The lender might ask for a new promissory note and ask you to change it to a full amount paying the note.
- When the note has been sold, the discount can be higher.
- Not all hard-money promissory notes must be paid in cold cash. Some lenders will accept this as payments.
- If the lenders pay directly to a different entity, the note may have been sold cheaper, the new lender may accept an even cheaper amount as full payment.