In some states and in certain situations, you might owe your mortgage lender money after a foreclosure sale of your home. This happens when the foreclosure sale doesn't bring in enough money to pay off your debt. The difference between the sale price and the debt is called a deficiency.

In most residential foreclosures in California, the foreclosing lender can't go after the borrower for the deficiency. But there are some exceptions. Read on to learn more.

What's a Deficiency After Foreclosure?

When a lender forecloses, the total debt the borrower owes to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a “deficiency.”

Example. Say the total debt owed on the first mortgage is $500,000, but the home sells for $450,000 at the foreclosure sale. The deficiency is $50,000.

In some states, the lender can seek a personal judgment, which is called a deficiency judgment, against the borrower to recover the deficiency. Generally, once a deficiency judgment has been obtained, the lender may collect this amount—in our example, $50,000—from the borrower by doing such things as garnishing wages or levying a bank account. (To learn more about deficiency judgments in the foreclosure context, see Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)

Deficiency Judgments Following Nonjudicial and Judicial Foreclosures

In California, foreclosures can be either judicial or nonjudicial. Judicial foreclosures are administered though the state court system, while nonjudicial foreclosures have no court supervision and are handled by a trustee. Most residential foreclosures in California are nonjudicial. (For more on the difference between judicial and nonjudicial foreclosures, and the typical process for each, see Will Your Foreclosure Take Place In or Out of Court?)

Deficiency Judgment After a Nonjudicial Foreclosure

In California, a lender can't get a deficiency judgment after a nonjudicial foreclosure. (Cal. Code Civ. Proc. § 580d). Because most residential foreclosures are nonjudicial, this means that most Californians going through foreclosure don't have to worry about being on the hook to the foreclosing lender for a deficiency judgment.

Deficiency Judgment After a Judicial Foreclosure

If the lender chooses to pursue a judicial foreclosure, deficiency judgments are allowed. To get the deficiency judgment, the lender must file an application with the court within three months of the foreclosure sale. The judge will then hold a fair value hearing to determine the fair value of the property. The deficiency judgment will be limited to the lesser of:

• the amount of the debt that exceeds the fair value of the property at the time of the foreclosure sale; or
• the amount of the debt that exceeds the sale price of the property at the foreclosure sale. (Cal. Code Civ. Proc. § 726[b]).

However, even if the lender uses judicial foreclosure, deficiency judgments are not allowed in cases where the loan was:

• used to purchase a 1-4 unit dwelling that is owner-occupied (a "purchase money loan")
• seller-financed (also known as “seller carry-back”), or
• a refinanced purchase money loan that was executed on or after January 1, 2013, except to the extent that new principal was advanced which is not applied to the purchase-money loan. (Fees, costs, or related expenses of the refinance are also not covered by the anti-deficiency protection. [Cal. Code Civ. Proc. § 580b]).

California’s One Action Rule

According to California's one action rule, the lender can only pursue one form of action for the recovery of a debt or mortgage. (Cal. Code Civ. Proc. § 726[a]). This means that a mortgage lender is only allowed to:

• conduct a nonjudicial foreclosure (a trustee’s sale)
• judicially foreclose, or
• sue on the promissory note for the balance of the debt.

Security First Rule. The one action rule seemingly gives the lender the option to sue the borrower personally based on the promissory note and forego foreclosure. However, courts have interpreted the rule to mean that a lender must pursue the secured real estate first. This is known as the “security first rule”. This means the lender cannot sue on the promissory note as the first method of collection. (Cal. Code Civ. Proc. § 726(a)).

Talk to an Attorney

If you’re a California homeowner facing a foreclosure and want to learn about any defenses you may have or about different ways to avoid a foreclosure, consider talking to an attorney. If you can't afford an attorney, a HUD-approved housing counselor can tell you about foreclosure avoidance options.

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