If you are exploring a Short Sale as an option to Avoid Foreclosure An important factor in whether you can be liable for a deficiency balance is whether your loan is a non-recourse loan or a recourse loan. A non-recourse loan restricts your lender’s ability to collect on your defaulted loan to the assets used to secure the loan. For your mortgage loan, it is likely that the home itself was the only security. If you have a non-recourse loan and your lender forecloses on you, then it cannot get a deficiency judgment and attempt to collect on it. It can only sell the home and keep the proceeds.
Most non-recourse loans are restricted to loans used to purchase a primary residence. If your lender foreclosed on your investment property or vacation home, you likely are liable for the deficiency balance. You could also be liable for the deficiency balance if you had taken out a loan on a primary residence and the home was no longer your primary residence.
A recourse loan is one where the lender has the legal means to collect the deficiency balance from you. Your lender can pursue collections, including suing you to get a deficiency judgment against you, which can lead to a levy on your wages. Your lender can also sell or assign the debt to a collection agency that can come after you to collect on the debt. The option to pursue you for the un-paid balance of your loan is at the sole discretion of your lender and they have the legal authority to initiate collection without notifying you.
Lenders realize that if you went through a foreclosure or short sale that you may have a severe financial hardship which makes collecting on the debt difficult. If your lender takes the time, expense, and effort to get a judgment against you, it may never be able to collect. Therefore, it may not even pursue collecting in the first place.
Some States including California have instituted consumer protections legislation to help consumers in case of Recourse loans to make it difficult for lender to pursue home owners. In non-recourse States, your lender generally cannot come after you for any balance that remains after the proceeds from the sale of your primary residence home are applied to your outstanding mortgage debt. However, even in non-recourse States, things are not universal and you need to educate yourself about the type of loan you have to determine your risk exposure when you make a decision on your options to Avoid Foreclosure.
In fact, it is a good idea to know whether your loan will be a recourse or non-recourse loan before you take out a loan. Also, discuss your loan types with your Short Sale Expert to determine your risk exposure in case you decide to stop making payments on your loan.