Dear Kari,
I was at a neighbor’s party last night and was speaking with a guest who said he can’t buy a house until he pays back the lender from his short sale, as he had to sign a note for $85,000 to complete the sale or go to foreclosure.
My wife and I are contemplating a short sale ourselves, as my wife has been out of work for over a year and our savings is used up.
Could you please help us understand what will happen to us if we do a short sale on our home as we have a first loan and a second?
Answer:
I feel for the person that you were chatting with.
Before the current laws came into place, there was a strong possibility in some cases of a required personal note to be carried back in order for the bank to agree to the short sale.
Luckily for you and your wife, the laws have since changed.
On July 15, 2011 the California legislature enacted a new law expanding the protection for a homeowner against personal liability after a short sale.
This new law, Senate Bill 458, applies the same treatment to any secondary or junior loans involved in the transaction.
In short, this means all lien holders must agree to waive their right to pursue the deficiency judgment, and the borrower cannot be made responsible to owe or pay for a deficiency in a short sale (with requirements and exceptions).
It’s good to know that this law only applies to short sales that closed escrow after the new law came into effect.
Here are some of the requirements:
• Mortgage loan is solely secured by a deed of trust.
• Mortgage loan is for one to four residential units.
• Borrower sells for less than the outstanding loan or loan balance owed.
• Lender provides a written short sale approval.
• Title voluntarily transfers to a buyer by grant deed or other conveyance and the document is recorded in the county where the property is located. The property cannot be sold to a family member.
• Proceeds of the sale have been tendered to the lender.
Note that some exceptions to the new law include: a lender seeking damages for a borrower’s fraud or waste; a borrower that is a corporation, on a limited liability company (LLC) or a limited partnership; a political subdivision of the state, as lien secured by a bond as specified; a public utility lien and additional rules apply if a note is cross-collateralized by more than one property.
This information is believed to be accurate and it is intended to provide a general answer, for legal advice contact your attorney.
Kari McCoy owns the Kari McCoy Group. E-mail her at sold@karimccoygroup.com
