If I Lose My Home In Foreclosure Am I Still Liable For The Debt?

Regrettably, many homeowners these days are finding that their homes are under water, meaning they are worth less than the amount owed on them. Naturally, they find themselves asking, “If I lose my house to foreclosure, am I still liable for the remainder of the mortgage?” Let’s take a look at this commonly asked question.

The following is a brief and general summary of the law in California as it applies to this issue. Please understand that this article is only for general information and should not be used as a substitute for specific legal advice. It should also be understood that the law discussed in this article pertains only to California, and is not comprehensive coverage of its subject.

Here we go. Whether or not you are liable for any amount remaining on your loan after your house is sold in foreclosure is dependent on two things.

1. Which type of foreclosure process is used; and,
2. The specifics about the nature of the loan itself.

With regard to the foreclosure processes; in California there are two types of foreclosures, judicial and non-judicial.

The first type, non-judicial foreclosures, are also called trustee sales, and are by far the most common type of foreclosure.  These are foreclosures that are conducted pursuant to the agreements made in the deed of trust that was signed at the time the loan was taken out. The deed of trust pledges the house as security for repayment of the loan.

Judicial foreclosures, on the other hand, are a form of a court proceeding, much like a lawsuit. Although judicial foreclosures exist in California, they are far less frequently used, in part perhaps because in certain circumstances the borrower has up to a year following the judicial foreclosure to redeem the property, meaning repurchase it by paying the amount that was bid at the judicial foreclosure.

Another way of asking the question of whether you are liable for the balance remaining on the loan after foreclosure is by asking whether you are liable for the “deficiency.” “Deficiency” is another term for the amount of debt remaining after a house is sold in foreclosure, after credit for the money received at the foreclosure sale. The deficiency is the amount by which the mortgage debt exceeds the price the house is sold for at the foreclosure. For example, if there is $500,000.00 owed on the mortgage, and the house goes to foreclosure and the winning bid is $375,000.00, there is a $125,000.00 deficiency.

Lenders in California are prohibited from seeking deficiencies – meaning the homeowner is not liable for the deficiency – in three main situations:

1. At any time after a non-judicial (trustee’s sale) foreclosure;
2. On any seller-financing obligation; and
3. On any purchase-money obligation where the proceeds of the loan were used in whole or in part for the purchase of an owner-occupied, single-family residence in a building of one to four units.

As previously explained, most foreclosure sales are of the non-judicial, or trustee’s sale, variety. Lenders are prohibited from pursuing a deficiency after a trustee’s sale. If the lender forecloses non-judicially, and takes back the property after a trustee’s sale, or if the property is sold to a third party at the trustee’s sale, there cannot be an action for a deficiency. Thus a homeowner is not liable for the deficiency following a non-judicial (trustee’s sale) foreclosure.

If a lender wants to pursue an action for a deficiency, it must do so by judicial foreclosure. This involves hiring a lawyer and filing a lawsuit, and is very involved procedurally. The process includes a fair value hearing and a right of redemption following the foreclosure. It is for these reasons that this procedure is less commonly used.

Even if a lender determines to foreclose judicially, it is still barred from pursuing a deficiency in two important situations.

1. If the debt obligation is seller-financing. This means if the seller of the property is the one who made the loan by taking back a promissory note in payment for the property. In these situations the seller cannot pursue a deficiency.
2. If the loan was a purchase money loan for the purchase of an owner-occupied, single-family residence of no more than four units. A purchase money loan is one where the proceeds of the loan are used entirely or mostly for the purchase of the property. Thus if the money from the loan was used to purchase the borrower’s single-family residence in a four-plex or fewer units, the lender cannot pursue the borrower for a deficiency even if the lender uses the judicial means of foreclosure.

The above is a general overview of when homeowners might find themselves liable for the mortgage debt remaining after the foreclosure of their home. If you are facing the foreclosure of your home you should discuss the above with a knowledgeable real estate lawyer to better understand how these laws apply to your specific situation.

Peter N. Brewer, Esq., is a California real estate attorney with thirty years’ experience, and is the owner and managing partner of The Law Office of Peter N. Brewer, in Palo Alto, California. The firm serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, and other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, creditor representation in bankruptcy proceedings, breach of contract matters, and other litigation and transactional work. The firm’s clients include homeowners, brokers and lenders, and other real estate professionals throughout Northern California. You can contact The Law Office of Peter N. Brewer at 350 Cambridge Avenue, Suite 200, Palo Alto, California 94306, phone: (650) 327-2900, or on the Web at www.BrewerFirm.com.