If your home sells for less than what you owed on the mortgage, you may still owe money and the creditor can get a deficiency judgment against you. California homeowners have access to certain protections under the state’s anti-deficiency statutes. These laws address borrowers’ rights during the foreclosure process, including deficiency balances and when and how much you have to pay. This article will explain deficiency judgments in California, when they apply, how to calculate them, how you can minimize what you owe under California’s Code of Civil Procedure (CCP).
Written by Todd Carney, J.D. Harvard Law 2021.
Updated November 26, 2021
It’s always tough to lose a home in foreclosure to a creditor. The creditor will then sell your home at a foreclosure sale to recoup their losses. But if your home sells for less than what you owed on the mortgage, you may still owe money. In this case, the creditor can get a deficiency judgment against you, which can drive you further into debt. Fortunately, California homeowners have access to certain protections under the state’s anti-deficiency statutes. These laws address borrowers’ rights during the foreclosure process, including deficiency balances and when and how much you have to pay.
This article will explain deficiency judgments in California, when they apply, how to calculate them, how you can minimize what you owe under California’s Code of Civil Procedure (CCP).
What’s a Deficiency Judgment?
If you fail to pay your mortgage payments and default on your mortgage, your lender has the right to foreclose on your home. Lenders often then sell the home to try to recoup their loss. If the amount your home sells for isn’t enough to pay off the full amount you owed on the mortgage or deed of trust this creates a deficiency balance. If the creditor sues you and receives a deficiency judgment from the court, they can pursue you for the rest of the debt.
The judgment amount will include what you owe on the mortgage, plus interest and any costs the lender incurred during foreclosure. To illustrate this formula in action: If you owed $100,000 on your home and it was foreclosed and sold for $85,000, there’s a $15,000 deficiency. If the interest, fees, and foreclosure costs totaled $5,000, you’d be responsible for a deficiency balance of $20,000 ($15,000 + $5,000).
Deficiency Judgments in California
California’s Code of Civil Procedure (CCP) says that when the lender forecloses through its power of sale, it must go through a judicial foreclosure process to get a deficiency. This means the lender has to take legal action and get a court order to foreclose, usually from a superior court. CCP Section 580b outlines the requirements for judicial foreclosures. The lender must file a deficiency application with the court no later than three months after the foreclosure sale. That said, judicial foreclosures aren’t very common in California.
Most lenders pursue nonjudicial foreclosures, which happen outside the court system. Nonjudicial foreclosures are typically set up under the property’s deed of trust. This allows the lender to foreclose without going through the California court system. Instead, a foreclosure trustee oversees the whole process, which ends in a trustee sale. In this case, the lender or mortgage servicer is a senior lienholder on the property. This means they’ll get paid first when the home is sold. But with a nonjudicial foreclosure, they can’t pursue a deficiency judgment. However, junior lienholders can.
Junior lienholders typically hold a second mortgage or a home equity line of credit (HELOC). Their interest is “junior to” the superior lienholder, which is usually the lender who owns the first mortgage or deed of trust. If the superior lienholder forecloses, junior lienholders can get a deficiency judgment, even in nonjudicial foreclosure processes.
How Deficiency Judgments Are Calculated
If the mortgage holder decides to do a judicial foreclosure to get a deficiency judgment, the law governs how the deficiency amount is calculated. According to the CCP, the overall amount of the deficiency judgment will be the lesser of:
The mortgage balance plus associated costs (such as interest) minus the fair market value of the property on the day that the property was foreclosed.
The mortgage balance plus the associated costs minus what the property is sold for at foreclosure.
For example, say you have a mortgage balance of $100,000 and associated costs of $20,000 for a total of $120,000. If your home sold for $50,000, you could be on the hook to pay $120,000 - $50,000, which is $70,000. But let’s say the fair market value of the property is $100,000. In this case, the law works in your favor and you’d only owe $20,000, which is the mortgage and costs ($120,000) minus the fair market value ($100,000).
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The California Anti-Deficiency Law
California’s anti-deficiency legislation limits the methods lenders can use to get a deficiency judgment as part of a judicial foreclosure. The law forbids lenders from pursuing a deficiency if:
The borrower claiming protection from the statute lives in the home, AND
The home is part of a building that houses one to four families. Buildings that have two to four families are typically duplexes or small apartment buildings.
Additionally, the borrower must have only used the loan to buy the property.
Deficiency Judgments and Refinancing
California law also provides anti-deficiency protections when borrowers refinance their homes. If you refinance and get a second mortgage but you use some of the money from the second mortgage on something other than paying off the previous mortgage, you may be subject to a deficiency if there’s a foreclosure on your home. That said, lenders are limited in how much they can collect on this deficiency. They can only get a judgment against the portion that wasn’t used toward the mortgage payments. So if you refinance your home loan for $100,000, and use $80,000 toward the mortgage and $20,000 to pay off credit card debt, the lender can only get a deficiency judgment for the $20,000 you used to pay off credit card debt.
The One-Action Rule
California law has a “one-action rule,” which mandates that the mortgage company has to either foreclose on the borrower’s real estate or pursue a lawsuit on the basis of the promissory note. The lender can only do one measure at a time. So if a mortgage company wants to collect payments that you owe, they need to complete the foreclosure process first. They can only sue you once foreclosure’s complete. If they sue you for the payments, they need to win a judgment before they foreclose on you.
The one-action rule extends the amount of time it takes the mortgage company to collect your debt and remove you from your home. It also prevents you from being overwhelmed with legal proceedings, since only one can occur at a time.
The Security First Requirement
The law also has a security first requirement, which means that the first lienholder must seek a foreclosure sale on your real estate to get the money that you owe. Given that they are required to seek a foreclosure, that will likely count as their “one action.” If there’s a deficiency, then the second lienholder can pursue a deficiency judgment on a promissory note, in other words, a deficiency balance lawsuit.
Purchase Money Loans
California law forbids collecting a deficiency on a purchase money loan, which is when the seller of the property provides a loan to the buyer.
Deficiency Judgments Aren't Allowed on Short Sales in California
A short sale is where you sell your real property for less than what you owe on the mortgage. Since the sale amount will come up short, your lender has to approve the sale. When a lender does this, it’s because it’s easier than moving forward with a foreclosure. It also often results in a smaller loss for the lender. Lenders who agree to short sales can’t get a deficiency judgment following the sale in the state of California. The only exception is if the borrower committed short sale fraud or damaged the property.
Deficiency Judgments With Deeds in Lieu of Foreclosure in California
A deed in lieu of foreclosure is where you agree to give the legal title of your property to your lender in exchange for being forgiven for your mortgage debt. Unlike with short sales, lenders that allow borrowers to do a deed in lieu of foreclosure can then pursue borrowers for a deficiency. The law doesn’t prohibit lenders from doing this, but there are steps you can take to stop lenders from getting a deficiency judgment with a deed in lieu.
When you make a deed-in-lieu agreement with your lender, ask for a waiver in the agreement that states the lender can’t pursue a deficiency judgment. If the lender refuses to include this waiver, then you should pursue a short sale or allow them to foreclosure, since both of those scenarios will offer you protection. It can be difficult to get the right legal language on such a waiver, so it’s a good idea to get legal advice.
The California Code of Civil Procedure closely regulates deficiency judgments. Generally, it only allows such judgments to take place under judicial foreclosures. However, junior lienholders can pursue deficiency judgments after a nonjudicial foreclosure sale. California also protects borrowers who live in the residential property that’s being foreclosed if the property is in a building with 1-4 units and the borrower only used the loan for the home purchase.
The one-action rule and security first requirements make it more difficult for primary lienholders to pursue a deficiency, but junior lienholders can still try to get them. These judgments can’t be pursued on short sales but can be on deeds in lieu of foreclosure unless you get the company to include an explicit waiver. If your lender can pursue you for a deficiency balance, there are two ways to calculate the balance under California law. Each involves the property value and what the property is sold for.