Let’s say you have a 1st mortgage on your home in the amount of $400,000. You decide you want to short sell the property. Let’s assume you find a buyer who will pay $300,000 for the property. You contact the holder of your 1st mortgage who “consents” to the short sale.
You owed the lender $400,000 and the lender received $300,000 in the short sale. Do you owe the lender the $100,000 deficiency?
(Click here for the related question of whether you owe money after a foreclosure)
Many people think that by “consenting” to the short sale the lender is agreeing to accept the $300,000 as full payment of the $400.000 debt. But this is not true. By “consenting” to the short sale, all the lender is agreeing to do is to remove their deed of trust on the property in exchange for the payment of the $300,000. By consenting to the short sale the lender is agreeing to allow you to sell the property. But the lender is not agreeing to waive the $100,000 deficiency by consenting to the short sale.
In order for the bank to waive the deficiency, the bank must do so in writing. But most people do not read the short sale documents and they do not really know whether or not the bank is waiving the deficiency. You can’t rely on your broker to advise you if the lender is waiving the deficiency. Of course, if you hire an attorney to review the documents he will tell you if the lender is waiving the deficiency. But many people don’t hire an attorney when they do a short sale.
As a result of this many people who sell their property in a short sale are surprised to find out that they still owe the bank thousands of dollars after the short sale.
The California Legislature helped out by passing CCP 580e. This section provides that there will be no deficiency owed by an individual after a short sale that you’re doing with the cooperation of the lender if you meet the following requirements
1 The loan in question was a 1st mortgage (not a 2nd, HELOC, etc.)
2 Your property was 4 units or less
Example: You have a 1st on your single family residence for $400,000 and a HELOC with a balance of $27,000. You find a buyer that will pay $350,000 for your house. The holder of the 1st consents to the short sale. The holder of the HELOC consents to the short sale in exchange for a payment of $1,000.
After the short sale, you do not owe the holder of the 1st any money. But you still owe the holder of the HELOC $27,000 (minus the $1,000 that lender received in the short sale).