Legal Question in Real Estate Law in California

If you refinanced your original purchase money loan, then the refinance loan is recourse. However, if a short sale is successful the bank should agree to waive any potential deficiency. You need to consult with a knowledgeable attorney and real estate agent.

"Recourse" is also correct terminology, but more often you will hear terms like "deficiency" or "deficiency judgment" used in speaking about borrower liability for California home loans.

While it is true that the foreclosing lender on a refi is likely to be able to seek a deficiency judgment for a payoff shortfalll, the lender would have to elect to go to court to accomplish the foreclosure, rather than use the simpler and quicker trustee's sale method. We find that under current conditions, relatively few lenders are going after deficiencies. This would be especially true where the deficiency is relatively small, as your hopefully is if you refinanced so recently.

Short sales are negotiated deals, largely falling outside the anti-deficiency laws and therefore considerations about whether the loan itself is recourse or non-recourse are somewhat irrelevant except insofar as that affects the negotiating strengths of the parties. The short sale agreement can turn a recourse loan into a non-recourse full settlement, or can turn a non-recourse loan into a deal where the borrower (foolishly) signs an agreement opening himself up to a future collection effort.

Using a real-estate person (agent, broker) with short-sale experience is quite important, to coordinate the process between prospective buyers, seller and lender representatives.

To evaluate your advantage in short selling vs. being foreclosed, consider not only that your loan, as a re-fi, is subject to a court foreclosure and deficiency judgment, but that lenders tend to avoid the time, hassle and expense of going to court unless one or more of the following "risk factors" are present: (1) the probable deficiency is relatively large, (2) the lender suspects the borrower "fudged" the numbers on the loan application, (3) the borrower is known to have plenty of other assets that can be levied upon to satisfy a judgment, (4) the lender is an individual, small investment partnership, etc. that cannot afford to lose any money; or (5) the borrower has committed reckless or careless acts against the collateral such as not paying the taxes, neglecting maintenance, not insuring it, etc.