I was facing foreclosure on my California home, a single-family house. I avoided the foreclosure by completing a short sale for less than the amount of my mortgage. I signed a deed to the new owner and the proceeds from the short sale were distributed to the lender. Can the lender now sue me for the remaining mortgage balance?
In California, the lender cannot pursue a deficiency judgment following a short sale in most cases.
A short sale is a sale of the property where the seller’s lender agrees to accept less than what it is owed in exchange for releasing the security interest (a mortgage or deed of trust) on the property. The difference between the sale price and the total debt is called a “deficiency.” (Learn more about short sales to avoid of foreclosure.)
Example. Say the total debt owed is $300,000, but the lender agrees to let the borrower sell the home to a new owner for $250,000. The deficiency is $50,000.
In some states, the lender can sue you and seek a personal judgment to recover the deficiency. Generally, once a deficiency judgment has been obtained, the lender can enforce the judgment by seizing your bank account or garnishing your wages.
(To learn more about deficiency judgments after a short sale, see our Deficiency Judgments area.)
There are many states that prevent a lender from getting a deficiency judgment following a foreclosure, but hardly any have laws prohibiting a deficiency judgment following a short sale.
You’re fortunate that your home was in California where state law bars a lender from getting a deficiency judgment after a short sale in most circumstances.
In California, the lender cannot get a deficiency judgment after a short sale so long as the following criteria are met:
Junior lienholders are also prohibited from pursuing a deficiency judgment if they have agreed to the short sale.
(For more information on laws that prohibit a deficiency following a short sale see Nolo's article States that Prohibit Deficiency Judgments Following Short Sales.)
For borrowers that live in states that allow a deficiency judgment following a short sale, there are several ways to avoid having to pay back a deficiency:
Learn more about each of these options in Nolo’s article How to Avoid a Short Sale Deficiency Judgment.