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.
What Is a Deficiency Judgment?
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.)
California Law Prohibits Deficiency Judgments Following Short Sales
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:
- The loan was solely secured by a deed of trust or mortgage.
- The dwelling is residential and contains no more than four units.
- Title has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded in the county where the home is located.
- The proceeds of the sale have been tendered to the lender or lender’s agent in accordance with the parties’ agreement (Cal. Code Civ. Proc. § 580e(a)(1)).
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.)
Avoiding a Short Sale Deficiency Judgment in Other States
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:
- Get the lender to give up its right to seek a deficiency judgment. One way to avoid a deficiency judgment is to convince the lender to forego its right to a deficiency.
- Make the lender a settlement offer. If the lender refuses to waive the deficiency entirely, you can offer a smaller amount to settle the deficiency. This can be done in a lump sum payment or in installments over time.
- Take the chance that your lender won’t bother to sue you for the deficiency. Even if the lender reserves the right to pursue a deficiency judgment, that doesn’t mean that it necessarily will actually follow through and file a lawsuit to get one.
- File for bankruptcy. A bankruptcy can eliminate the debt. However, if eliminating a deficiency judgment is the only reason you’re thinking of filing bankruptcy, this may not be your best option.
Learn more about each of these options in Nolo’s article How to Avoid a Short Sale Deficiency Judgment.