Legal Question in Real Estate Law in California

Re: Buying 2nd home, and short selling

I would also add that borrowers are vulnerable to suit from lenders for matters not covered by the anti-deficiency laws, such as loan-application fraud. Anyone who seems to have income or assets even though they defaulted on a mortgage is likely to have their situation examined with a large magnifying glass by the unpaid lender, and any exaggerations of income, net worth, etc. could be the subject of a collateral suit for fraud.

Re: Buying 2nd home, and short selling

Walk away. If both loans are purchase money, and it is your primary residence, you may be protected from a deficiency after a foreclosure; you would need to sit with a qualified real estate attorney to review all of the facts and make sure you are infact protected before taking any actions. As for a short-sale of the existing home, the banks will retain the right, after the sale, to pursue you for the "short" on the sale. They are legally allowed to do that in California, which means if you sold it for $200,000 less than what you owe, the bank will still come after you for the $200,000 and continue to report it on your credit report, which means you won't qualify for house #2.

I think, however, as good as your plan sounds, it has one fundamental flaw. If your income does not allow you to qualify for both homes, how are you going to get a loan to buy the second home before the first home is sold, or lost in foreclosure? The bank is going to look very carefully at your income, and when you cannot debt-service both properties, they will not approve you for a loan. They may approve you contingent upon a sale of your existing property, but they generally won't close the purchase loan on house #2 until the sale of house #1 is closed and the loan fully paid off. You need to go back and look at this more carefully - perhaps with a different realtor - because I don't see how you can do what you are attempting to accomplish given the inability to qualify for both loans at the same time.

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Re: Buying 2nd home, and short selling

Afraid I have to agree with Attorney Gibbs. It will be difficult for you to obtain a mortgage on a 2nd home while the first is in its current situation. Unless, of course, you are current on the mortgage of the 1st and can show enough income for the bank to justify allowing the 2nd.

I agree with the fact that a short-sale is probably not in your best interest. Deed in Lieu is a good option because it allows the complete amount to be wiped, as opposed to the short-sale where you can be followed for the additional amount and it is unclear if the Federal Government will consider this to be loan forgivenness and then charge you tax for it as ordinary income.

Unfortunately, like most people, it sounds more like you will need to get a rental property for a while until the dust clears.

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