This a simplified explanation of the foreclosure and short sale process. I am an attorney and a real estate broker and many people in California today are faced with the possibility of a foreclosure and/or a short sale and don't understand the process and consequences. I will try to explain the process and some options as simply as possible. If I oversimplify, I apologize. I am trying to speak to the layman and not to lawyers or other experts in the field. With my wife, who is also a broker, we have conducted many successful short sales and have also recommended foreclosures when a short sale was not beneficial to the client. At the very least, we can provide information and hopefully comfort to those going through what is a traumatic experience.
- A foreclosure is when a bank takes over your home when you have not been paying the mortgage. (A home is described as one-to-four residential units.) There are two main types of foreclosures. One is what is called a judicial foreclosure which is when the bank takes you to court. In this kind of foreclosure, the bank will try to recoup any losses it might incur if the mortgage is more than the value of the home. In California, a judicial foreclosure is rarely used because it takes more time and is more expensive than the non-judicial foreclosure. The second type of foreclosure is the non-judicial foreclosure. Here the bank closes under the deed of trust and the bank cannot come after the homeowner if the bank has suffered a loss-that is the mortgage is greater than the value of the home. Non-judicial foreclosures are by far the most common way that banks foreclose in California. The one action rule (CCP 726) states that a bank can foreclose either judicially or non-judicially, but not both. If the bank forecloses non-judicially, then they can not seek what is called a deficiency judgment-that is money from the homeowner. CCP 580(d).
- The definition of purchase money is money that was used to buy the home. If you refinance a home, then that money is no longer purchase money. If you take out a second to refurbish your home or to buy a car, then that money is not purchase money. Purchase money is only money that was originally used to buy the home. The general rule has been that banks cannot seek a deficiency judgment if there is a foreclosure or short sale on purchase money. (See CCP 580(b)) Under Senate Bill 931, this general rule has been expanded to include purchase money that the homeowner refinanced. However, this bill only deals with the first mortgage on a home. It doesn't deal with refinanced second mortgages.
- The major problem with having one's home foreclosed is that it greatly harms the homeowner's credit, generally for seven years. This may affect one's ability to get a job, to rent another place, buy another home or, if one does get a credit card, one might have to pay a higher interest rate. Foreclosures effectively kill ones credit for seven years and, if you can avoid it, the homeowner should try to do so.
- One way of avoiding a foreclosure is through a short sale. A short sale is a sale for a price that is less than the mortgage. The homeowner sells to another person but has the bank who holds the mortgage approve the sale.
- The main advantage of a short sale is that the short sale doesn't damage ones credit as much as a foreclosure. Generally, one's credit is damaged to a lesser degree for 18 to 24 months. Generally the bank pays all the expenses of a short sale including the sales commission.
- The main problem with a short sale is two fold. First, the homeowner should get the bank that holds the mortgage to agree that the sale is in full satisfaction of the mortgage debt. Some homeowners (or their real estate agents) don't get this language inserted into the agreement and the bank agrees to the short sale and then comes after the homeowner for the difference between what the bank is owed under the mortgage and amount collected in the short sale. Second, if there is a second mortgage, a foreclosure is more likely to result in the owner of the second not to come after the homeowner for a deficiency judgment. One reason is that under CCP 580(a), the owner of the second only has three months after the first is foreclosed upon to sue the homeowner. Under a short sale, the bank does not have this restriction. Therefore, with a short sale, it is imperative that the homeowner (through his lawyer or real estate agent) negotiate with the second lender (if there is a second lender) so that any money owed to the second is resolved. If the second lender refuses to play ball, then it is often better to foreclose than to do a short sale. Though not always possible, a good real estate attorney or real estate agent should be able to strike a favorable deal with the second lender. It takes, however, persistence and experience on the part of the real estate attorney or agent.
- In short, to protect the client, the sale of the home and the negotiation of the release of any debt are both integral to a short sale.
- Recent legislation has created HAFA which is an acronym for Home Affordable Foreclosure Alternatives. This program is designed to help short sellers. Among the benefits are that it gives homeowners pre-approved shorts sale terms before listing the property, the homeowner is fully released from future liability for the first mortgage debt and can receive $3,000 for relocation assistance. Also HAFA uses standard processes, documents and timeframes/deadlines which can streamline the process.
- In short, the foreclosure and short sale process can be fraught with dangers as the laws and process are daunting. I give a free thirty minute consultation to see if I can help. Both myself and my wife have a great deal of experience in working with banks and other attorneys to get you the best result possible.
