I am losing my home through a nonjudicial foreclosure in California. I took out the first and second mortgage from the same lender when I bought the house. Both loans are still with this lender. The home is underwater and the equity won't even cover the first mortgage. After the foreclosure, will I still be liable to the lender for the remaining loan balances?
No, the lender cannot come after you for the remaining loan balances (called deficiency judgments) in your situation.
Whether or not a lender can come after a borrower for a deficiency judgment following a foreclosure in California depends on a variety of factors. Keep reading to find out why a lender can’t get one in your situation.
California Foreclosures and Deficiency Judgments
Residential foreclosures in California are typically nonjudicial (though they can be judicial), which means the lender does not have to go through state court to get one. (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?)
Deficiency judgments are not permitted following a nonjudicial foreclosure. A lender can only sue a borrower for deficiency in a judicial foreclosure. Even with a judicial foreclosure, a deficiency judgment cannot be obtained when the loan was:
- used to purchase a one to four unit dwelling that is owner-occupied (a "purchase-money loan")
- a seller-financed loan (a loan you take out from the person or entity selling the property to you), or
- a refinanced purchase-money loan that was executed on or after January 1, 2013, except for new principal (that was not applied to the purchase-money loan), fees, and costs.
Consequently, most homeowners in California won’t face a deficiency judgment in a first mortgage foreclosure.
(Learn more in Nolo's article Deficiency Judgments After Foreclosure in California.)
Sometimes a junior lienholder (such as a second mortgage lender) can sue you for the outstanding balance of its loan. If your property is underwater and you have a second or third mortgage, or a HELOC, you may face a lawsuit from one of those lenders after the first mortgage lender forecloses, but only under certain circumstances.
Second Mortgages, HELOCs, and Other Junior Lienholders
After the first mortgage lender forecloses, any junior liens (including a second mortgage lien) are also foreclosed and those junior lienholders lose their security interest in the real estate. Those lienholders are then called “sold-out junior lienholders.” These sold-out junior lienholder can sue you personally on the promissory note to recover the outstanding balance of your debt, subject to a few exceptions.
Exceptions -- When Sold-Out Junior Lienholders Cannot Sue You
If the same lender holds both the senior and junior loan at the time of the foreclosure sale, the lender cannot come after you to recover the outstanding balance after foreclosing on the senior loan. (Since this is true in your case, you will not have to repay the second mortgage after the foreclosure of the first.) Also, California law does not permit the lender to get a personal judgment against you if the loan was:
- a purchase-money loan
- a seller-financed loan, or
- a refinance of a purchase-money loan.
Find out more about California Foreclosure Laws and Procedures.