You bought your home for $600,000, and can only sell the home for $450,000 house. If you foreclose or short sale your $600,000 house, can the bank then try to collect the $150,000 difference? Or to use the legal terminology, can the bank seek a deficiency judgment?

The answer, in California, is probably not. California Code of Civil Procedure §580b states:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

The good news for California borrowers is all purchase-money loans on a one- to four-unit residential dwelling are exempt from deficiency judgments.

Hard-money loans in California -- loans taken out after the home was purchased through a refinance or second mortgage -- can be subject to a deficiency judgment under the following conditions:

• The lender forecloses under judicial proceedings (California Code Civil. Proc. § 726).
• Most lenders foreclose through a trustee's sale; however, which does not give the lender the right to pursue a deficiency judgment, with one exception (see second hard-money second mortgages below).
• A three-month time limit applies to actions for deficiency judgments under a judicial foreclosure.
• If the second mortgage is hard money and the lender has lost security for that loan through a foreclosure or short sale -- making the security for the promissory note worth nothing -- the beneficiary of that second mortgage can pursue a deficiency judgment (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).
  

Lender CANNOT Pursue You If:

You have a NON-RECOURSE loan. You have a NON-RECOURSE loan if:

Lender MAY Pursue You If:

In most instances, these laws prevented a lender from obtaining a judgment against the borrower for any difference between the unpaid balance of the loan and the amount produced at a trustee’s sale (a “deficiency judgment”) if its loan was used to purchase residential real property (“purchase money”) and that property secured repayment of the loan (Code of Civil Procedure section 580b). This is the so-called “purchase money” anti-deficiency protection.

If you think the lender may have the right to pursue you, don’t lose hope! All other properties not protected under CCP §580b may possibly be protected under…

California Code of Civil Procedure §580d, which states:

No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.

In other words, if the bank comes forecloses on any of your real properties through a private sale rather than a judicial foreclosure, then you are still protected under the Anti-Deficiency Law, whether or not the loan was purchase money.

This Law varies greatly, so please consult a real estate lawyer for specific details on your property.

Helpful Reading:
* CCP Sec 557-582.5
* CCP 580b Law
* California Mortgage Saver
* Antideficiency Statues
* Cal CCP 580d
* Antideficiency Act Background
* The Mortgage Foriveness Debt Relief Act and Debt Cancellation

Chapter 13: New Short Sale Scams Taking Root, Don't Get Tricked