California has a “Security First” rule. This rule requires a lender to foreclose on a property before looking to a buyer’s other assets if a Buyer defaults on a loan.
The “Security First” rule can help borrowers who aren’t able to make the payments on their home. But homeowners need to be cautious when getting involved in short sales, deeds in lieu of foreclosure, or other negotiations with their lender concerning loan modification or defaults. An uninformed borrower can actually damage their position if they get involved in a short sale without taking the necessary steps to protect themselves.
Here’s how it works. Many borrowers today have two loans on their home. If their home is “underwater” then such borrowers may elect to sell their home for less than the amount of the loans against their properties. If the lenders agree to this, then such borrowers can use a “short sale” to get out of their underwater property.
But these days some lenders on a second loan are only agreeing to “release their lien” in a short sale. This is very different from having such lenders release all claims against the buyer under the loan. If the lender only releases its lien, then the lender may be only agreeing to release its mortgage lien so the homeowner can sell their property in a short sale. Unless the lender releases all claims against the buyer under the loan, the lender could be planning to make a claim against the borrower for the unpaid loan balance following the short sale.
This could be a very unpleasant surprise for an unsuspecting homeowner following a short sale. Such a homeowner might finish a short sale thinking that they are fully done with the property, only to find out later that their lender is making a claim against them.
Care must be used to avoid such situations. Homeowners who want to avoid such surprises should get competent, qualified professional assistance in connection with their contemplated short sale or deed in lieu of foreclosure.