On July 15, 2011, the California Legislature
enacted a new law (SB 458) expanding protection for homeowners against personal
liability after a Short Sale to include all trust deeds against a property.
Prior to this enactment, homeowners were restricted to no deficiency judgments
on first trust deeds only.
In a blog post on FICO.com-The
Banking Analytics Blog, the company analyzed several credit profiles
to reflect how credit is affected by various scenarios including mortgage late
payments, Short Sales and Foreclosures. Some parameters in selecting credit
profiles were based on criteria such as utilization, delinquency, usage, etc.
All credit files used had a current and active mortgage loan. Take a look at
the results below:
From the findings above, the FICO scores fair
better after a Short Sale without a deficiency judgment. The New Law is
applicable under the following circumstances:
- Mortgage loan
is solely secured by a deed of trust
- Mortgage loan
is for a one-to-four residential unit property
- Borrower sells
for less than the outstanding loan balance owed
- Lender
provides a written short sale approval
- Title
voluntarily transfers to a buyer by grant deed or other conveyance
document recorded in the county where the property is located
- Proceeds of
the sale have been tendered to the lender or lender’s agent in accordance
with the parties’ agreement
Homeowners
that meet the above guidelines are generally protected from lenders requiring a
borrower to pay a deficiency judgment on a one-to-four unit residential unit
property. This was most commonly seen with second trust deeds. Some
lenders were requiring a deficiency judgment against the seller, requiring the
seller to pay back the remaining balance on their loan amount after the Short
Sale closed. All in all, a Short Sale
with no deficiency balance scored a higher FICO score than Foreclosure and
Bankruptcy alternatives. Although there
are some exceptions to the law, most homeowners can settle a Short Sale without
walking away with a balance owed to the bank on any trust deed against the
property.
Byline:
Tiana Uribe is a licensed real estate broker and owner of West
Coast Living Real Estate Group. She holds a Masters Degree in Marketing.
