California property owners are lucky in that there is a fairly strict set of so-called “anti deficiency statutes” which control if, when, and how a lender may pursue a deficiency as part of, or after foreclosure.
The most important restriction is the anti-deficiency prohibition in cases of a “purchase money security interest” set forth in California Code of Civil Procedure 580b. While I hesitate to risk boring my reader with statutory language, it is important to understand this provision, so I’ll restate the abridged version:
No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
It’s the italicized and bolded stuff that is most widely applicable in the garden variety situation. Here’s what it means: If the loan being foreclosed on is the loan you got when you bought your house (a “purchase money loan”), then you can’t be hit with a deficiency judgment.
So what’s the catch? How can this be screwed up? The most common trap for the unwary is when the loan is a refinance of a purchase money loan, or a post purchase HELOC. In these cases, the the statute doesn’t apply.
But it’s not enough to just be a “second.” It has to be a true refi or HELOC. Meaning that the second you got when you bought the house because the lender couldn’t do the whole mortgage amount in one loan, that is still purchase money.