New California Law offers Relief from Deficiency Balances

by Gary and Lisa Schoeffler on January 22, 2011

in Legal Updates, Short Sales

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If you have been resisting a short sale on your home out of concern that the bank will come after you for the deficiency, you are not alone!  SB 931, effective January 1, 2011, will resolve that issue for many California homeowners.

With passage of SB 931, after the short sale of a residential property of one-to-four units, the holder of the first deed of trust (or first mortgage) cannot pursue the borrower (seller) for any deficiency under the note. If the lender consents to the short sale in writing, the lender is obligated to accept the sale proceeds as payment in full and the note is considered fully discharged. The borrower (seller) is protected even if the loan is refinanced as long as it’s secured by a first deed of trust. (Cal. Code Civ. Proc. § 580e (a).)

However, this law doesn’t apply to junior deeds of trust. Thus, the borrower (seller) may still be liable for the deficiency balance on those loans.

An exception to SB 931 occurs if the borrower (seller) has committed fraud with respect to the sale of the property or has committed “waste” of the real property (e.g., severely damaged the property) (Cal. Code Civ. Proc. § 580e (b)). Under these circumstances, the borrower (seller) may still be liable for the deficiency balance.

Note: SB 931 doesn’t apply if the borrower (seller) is a corporation or political subdivision of the state (Cal. Code Civ. Proc. § 580e (c)).  via Short Sales.

What is a deficiency?  With a short sale, except under certain circumstances, the lender may demand the balance still owed on the note that the sales transaction did not cover (e.g., short sale of the property pays the lender $120,589.23 but the full amount owed on the note is $250,000). This difference may be referred to as a “deficiency balance.” It is not really a “deficiency judgment” since no court has issued such a judgment as part of a judicial foreclosure. SB 931 removes that with regard to all first mortgages.                                                                                           

SB 931 is great news for California homeowners who find themselves struggling to keep their homes.  Interest rates are still low and there are plenty of buyers out there.  If you are upside down and unable to keep up with your mortgage payments, contact us to discuss your options.  We are experts in Ventura County Real Estate and have an extensive network of referral agents nationwide.  Visit our short sale page for valuable information about the process and if you qualify.  We have solutions and we look forward to working with you.

See SB 931 in it’s entirety here via SB 931 Senate Bill – CHAPTERED.

** We are not attorneys or tax experts. The information and provided above is for informational purposes ONLY. It will serve in a starting point to further investigate how a short sale or foreclosure may affect you. We HIGHLY RECOMMEND that you consult an attorney and tax adviser regarding your situation BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure. **

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Post by Gary and Lisa Schoeffler

Gary and Lisa Schoeffler are Ventura Real Estate Professionals specializing in residential real estate. Their expertise in helping both buyers and sellers is widely recognized in Ventura County. How can they assist you today? Wondering what the market is like? Call them, they will be happy to talk with you about it. 805-320-4472

Gary and Lisa has written 372 articles.

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