There is a lot of consideration and angst that homeowners go through in considering a short sale (appropriately so). Aside from the emotional turmoil, there are some very real financial and legal issues to deal with...

Earlier this year, Governor Brown (CA) gave some additional relief to underwater homeowners to protect their other assets from mortgage lenders in the event they did indeed go through a short sale.

Real quick, if you’re not familiar with the term Short Sale, it simply is a transaction where a homeowner sells his or her property in a bona fide arms length transaction for less than the amount owed on the mortgage(s). The lender or lenders must agree to the short sale and receiving less than what is owed to them.

The issue has been what are called recourse versus non-recourse loans. Basically this means that if the lender receives less than the amount owed to them, they can go after the borrower’s other assets in order to make up the deficiency (called a “deficiency judgment”). There’s been a law on the California books for decades that protected borrowers with first mortgages secured against 1-4 unit properties against a deficiency judgment. But that first mortgage had to have been used for the purchase of the property. So if you either refinanced that first mortgage and/or added a  second loan or Home Equity Line of Credit, you ran the risk that a lender could come after you for the money owed to them if there wasn’t enough equity in the property used to secure the mortgage, thus leaving your other real estate, investments and income at risk of being included in a deficiency judgment.

At the beginning of the year (2011), Governor Brown signed into law that all first mortgages would be exempt from recourse from a short sale irrespective if the mortgage was used for the purchase of the property. And in July, California added the exemption for all junior loans, i.e. second mortgages and Home Equity Lines of Credit.

A short sale will impact your credit history for many years and obviously it is not to be taken lightly. You absolutely need the inclusion of your financial advisor, an attorney with expertise in short sales and foreclosures, and a Realtor that specializes in short sales.

For more on the specific laws that pertain to short sales, deficiency judgments and foreclosures, Click Here

Jeff Smith has been helping families in the Marin community for more than 17 years. As a trusted financial advisor and mortgage advisor, Jeff helps his clients make better financial decisions to improve the outcomes of the financial choices in life.