If my second home is foreclosed on in California, do I have to repay the remaining mortgage balance?

If you lose your second home to foreclosure in California, you won't be on the hook for a deficiency.

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Question

I am losing my second home in California to a nonjudicial foreclosure. I owe quite a bit more than the property is worth. There are no other loans on the property. Will I owe the lender any money after the foreclosure?

(Find out more about California Foreclosure Laws and Procedures.)

Answer

No, the lender cannot come after you for a deficiency judgment under these circumstances.

What Is a Deficiency Judgment?

If the total amount you owe to the foreclosing lender exceeds the foreclosure sale price, the difference between the sale price and the total debt is called a “deficiency.”

Example. Say you purchased a vacation home in Big Bear a few years ago. The total debt owed on the mortgage is $300,000, but the house sells for only $250,000 at the foreclosure sale. The deficiency would be $50,000.

In some states, the lender can seek a personal judgment against you to recover the deficiency. Once a deficiency judgment has been obtained, the lender may collect this amount (in our example, $50,000) by doing such things as garnishing your wages or levying your bank account.

(To learn more about deficiency judgments, see Nolo’s Deficiency Judgments After Foreclosure area.)

What Is a Second Home?

Since you mentioned that the property being foreclosed is a second home, let’s define the term. A second home is a residence that you occupy for part of the year in addition to a primary residence. Second homes are often located in a resort or vacation area, such as in the mountains or near the coast.

Second-home loans usually have a lower interest rate than investment property loans (property that is purchased or used in order to generate income) and will usually include a Second Home Rider along with the mortgage. This rider typically states that:

  • you will occupy and only use the property as your second home
  • the property will be kept available for your exclusive use and enjoyment at all times
  • the property cannot be subject to any timesharing arrangement or rental pool, and
  • the property cannot be subject to any agreements that require you to rent the property or give a management firm (or any other person) control over the occupancy and use of the property.

If you violate any of these terms, the lender may initiate a foreclosure.

(Learn more about second homes.)

California Deficiency Judgments

While some states distinguish between owner-occupied and second homes (or investment properties) when it comes to the lender’s ability to obtain a deficiency judgment, California does not. The rule in California is that deficiency judgments are not permitted following a nonjudicial foreclosure. Since your second home is being foreclosed nonjudicially, this means the lender cannot get a deficiency judgment in your case.

(To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)

Second Mortgages, HELOCs, and Other Junior Lienholders. If you had more than one mortgage on the property, that junior lienholder (such as a second mortgage lender) could sue you after the first mortgage lender forecloses, but not if:

  • the lender that foreclosed the first mortgage is the same lender as the junior lender
  • the loan was a purchase-money loan (you took out the loan to buy the property)
  • the loan was a refinance of a purchase-money loan (for example, a refinance of your original mortgage), or
  • the loan was a seller-financed loan (you got the loan from the person or entity selling the property to you).

(Learn more in Nolo's article Deficiency Judgments After Foreclosure in California.)

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