Legal Question in Real Estate Law in California

Re: mortgage

You will be unable to sell your home for less than is owed on it without the lender's agreement, which is not routinely given. If you have a buyer whose offer is close to what is owed on the loan, contact the lender to see if they are willing to enter into an agreement for a "short sale." If no sale is obtained, then what will happen depends upon the type of loan you have and if you have more than one loan. If your loan is "purchase money", meaning it was created at the time you bought the house and is not a refinance loan, then all the lender can do is take back the property in a foreclosure. However, if the loan is not purchase money and if the house is not worth the amount of the loan, the lender can decide to sue for judicial foreclosure and get a deficiency judgment against you for the difference between what the house will bring at sale and the amount of the loan.

Re: mortgage

I could only add a little to the previous answer.

After a foreclosure sale, the buyer may either give you a notice to quit or perhaps they would rent to you for a while. If they want you out and you don't move within the notice period, you will be sued for unlawful detainer; the trial and post-trial formalities might give you a few more weeks time after the sale, but you would have to put up some defense.

In order for the foreclosing lender to be entitled to a so-called deficiency judgment, it would have to foreclose in court (rather than by trustee's sale, which is faster, cheaper and hence preferred by lenders) AND the loan being foreclosed would have to be something other than a purchase-money loan. If the property is your residence and is a single family or up to 4 unit property, any loan, whether a first or a second, is ineligible for a deficiency judgment, so long as it is a purchase-money loan.

In addition, I have seen at least one appellate case which holds that a refinancing loan MAY in some circumstances also be ineligible for a deficiency judgment IF it was a straight refi with no cash out and perhaps done by the original lender. I can't be sure of this, but if the facts fit your situation this may be very good news.

Finally, the lender will send you an IRS Form 1099 showing that you received income from them through loan forgiveness if the lender receives less than you owed. Yep, the IRS considers money you borrowed but don't have to repay as income!