Legal Question in Real Estate Law in California

First, remember that there are not one, but several, laws (and situations) where the lender is prohibited to seek a deficiency judgment upon foreclosure. Perhaps the most common and useful one is the prohibition against recourse to the borrower where the lender has chosen to foreclose by trustee's sale. Nearly all foreclosures are done that way. The exceptions are very small (non-institutional) lenders that can't afford a loss, lenders who are upset with the borrower for failure to maintain the property, insure it, pau taxes, and otherwise impaired the collateral, lenders who suspect loan-application fraud, situations where the borrower is known to be a very rich guy, and the odd situation where the loan doesn't contain a power of sale (by trustee) provision.

Next, it is your initial intent that governs whether the property is "owner occupied" or income property. If you used the home as your primary residence for the first four years, then circumstances changed, requiring you to move and rent, that should not disqualify you from yhr owner-occupied purchase-money exclusion from recourse.

Unless you fall into the rare exceptions mentioned, you should be OK.

I agree completely with Mr. Whipple on his first point. Non-judicial foreclosure, also called a trustee's sale, is far and away the most common method used by lenders to take property securing defaulted loans. And the One Form of Action Rule strictly prohibits any efforts to collect a deficiency after a trustee's sale. I would bet that at least 99% of foreclosures are via trustee's sales.

I do not necessarily agree, however, with his second point, which is your central issue: does converting the property to an income property cancel the purchase-money personal residence anti-deficiency law in California. I do not know that there is a clear answer on that. I have not done an exhaustive research project on it, but I have never come across any authority that addresses and answers that question. If Mr. Whipple has found such authority, I would be most interested in seeing it.

Lenders are prohibited from pursuing a deficiency judgment after foreclosing on a deed of trust by way of a trustee's sale (commonly called non-judicial foreclosure) by the provisions of Code of Civil Procedure section 580d. The one action rule is different, and has nothing to do with Code of Civil Procedure section 580d.

You are alluding to the anti-deficiency prohibitions of section 580b. That section prohibits a deficiency judgment to a foreclosing lender on a loan that was used to purchase a residence. Your issue is whether renting the property later on causes you to lose this anti-deficiency protection. The courts have always held that a purchase money deed of trust is determined at the time the transaction is entered into. "If the first deed of trust was originally a purchase money security instrument, it remains a purchase-money security instrument." (Frangipani v. Boecker (4th Dist. 1998) 64 Cal.App.4th 860, 864.)