Legal Question in Real Estate Law in California
Califonia real estate law question: We currently own a home that is worth $100-$115k less than our loan amount. There is not a 2nd, but we have refinanced twice. We would like to move, and will have the money to purchase a new home cash in a few months, but we will not be able to sell this house without huge a loss. Renting is not desirable either, for on top of the huge amount we owe now, we will have to put in money to ready the house to rent, as well as pay $200-$250/month to cover extra expenses and property taxes on this home.
I would like to know what options we have, ie forclosure, deed in lieu, etc, and what recourse the lender can take against us when the sale of this house does go through for far less than the loan amount. Can we be held financially responsible for the difference? Is there a way to do this right so we won't be?
1 Answer from Attorneys
For your upside down house, you have several options.
1. Refinancing: If you are only $200-$250/month short of breaking even by renting out the house, you may be able to refinance at a lower interest rate or a longer time. That could make renting the house possible. Look, though, at whether your current mortgage requires the house to be "owner occupied." If so, renting the house could trigger a default.
2. Work out a deal with the lender: Moves like the "deed in lieu" or "short sale" are simple. They just require the lender's agreement. In the "deed in lieu," the lender takes title to the house, without having to go through foreclosure. In return, the lender forgives all or some of the amount that is not covered by the equity (aka "the deficiency").
3. Walk away and let the house get foreclosed. At first glance, this seems the simplest thing to do. You just grab your things, move, and forget about it. The problem for you is that your current mortgage is a refinance, rather than a purchase money loan. In California, if a lender forecloses, using a non-judicial foreclosure (i.e. without the courts), then the lender gets the house, but cannot get a deficiency judgment (i.e. a judgment for the amount that is not recovered by the foreclosure sale).
But, if the loan was a refinance (not the loan that was used to buy the property), the lender has the option of doing a judicial foreclosure. (This option is not available for a purchase money loan.) A judicial foreclosure requires a lawsuit, costs a lot more than a non-judicial foreclosure, and takes a lot longer. However, the judicial foreclosure allows the lender to obtain a deficiency judgment.
If your lender thinks that it can recover the house and a judgment for the $100-$115K deficiency, then the lender may proceed with a judicial foreclosure.
In your case, you might look into options 1 and 2, before you just give up the property.
You can ask further questions about this matter by sending an email to me at [email protected].
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