Are you still obligated to debt after a foreclosure?

Most homeowners know foreclosure is the process a lender goes through to obtain the value of the property that secures a debt. What many homeowners do not know is that letting a home go into foreclosure may not end a homeowner’s obligation to pay the debt.

Obligation to debt after foreclosure depends on a number of factors, including whether the debt was a purchase money loan or non-purchase money loan, and whether the foreclosure was a judicial or a non-judicial foreclosure.

In years past when a lender foreclosed on a homeowner the value of the mortgaged property would nearly always exceed the amount loaned, enabling the lender to recover the loan amount plus any foreclosure costs. However, today’s market is far from what a lender would call a perfect world.

These days most foreclosures involve properties worth quite a bit less than the mortgages they secure. Compounding this many foreclosed upon homeowners have more than one mortgage holder.

Usually, the current value of the property is lower than the amount owed to just the first lender. Meaning that when the first lender forecloses, all other mortgage holders will be wiped out and lose the security of that home which normally guarantees their money.

Homeowners must recognize that a foreclosure only wipes out the lender’s security interest and does not necessarily wipe out their debt.

This is why it is so important for a homeowner to determine the type of loan they have, to know whether or not they may owe money after a foreclosure. Being a realtor, I am not equipped to state California law and recommend that one seek legal council when qualifying property and loan types.

With that said, with property values skyrocketing a few years ago, many homeowners refinanced their original loans resulting in new loans being considered non-purchase money loans.

To further complicate things, many homeowners also received stand alone second mortgages and/or home equity lines of credit (HELOC’s) which are also generally considered non-purchase money loans. In many cases, homeowners may still owe debt on a non-purchase money loan even after the property goes through foreclosure.

Another thing to be aware of is the difference in a judicial foreclosure versus a non-judicial foreclosure, as they relate to non-purchase money loans. Most of us in California are familiar with the non-judicial foreclosure.

This type involves the recording of a Notice of Default and eventual foreclosure sale. A judicial foreclosure is when the lender brings a lawsuit against the homeowner and asks the court to determine the rights of the parties involved in the foreclosure. Again seek legal council for details.

This brings me to the importance of a short sale versus a foreclosure. One of the most important duties your listing agent has is preparing a complete, lender specific, short sale packet for their lender(s) to review, resulting in a settlement statement for each lender involved.

It is a must that your agent has the experience and knows the difference between an actual settlement statement – stating that their lender(s) will not pursue any remaining balance – versus just receiving a lien release.

If you have questions regarding available inventory to purchase or the current bank servicer’s short sale incentives to sellers, contact Mike Mason, Broker/Owner of Mason Real Estate DRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors® (SRCAR), Short Sale & Foreclosure Resource certified by National Association of Realtors® (NAR) at [email protected] or by calling (951) 296-8887.

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