Can a Lender in California Get a Deficiency Judgment in a Foreclosure?

Full question:

I was foreclosed on. I may be fired from my job because a purchase money second shows a profit and loss of $87,603. Do I still legally owe this? If not, what law covers this? I know a lot of people are going through this and I thought once they took the property back you don't owe anything (Secured Loan).

• Category: Real Property
• Subcategory: Foreclosure
• Date: 04/07/2025
• State: California

Answer:

A deficiency judgment is a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full. This option may or may not be available to the lender, depending on whether they have made a recourse or non recourse loan. A non-recourse loan means the buyer cannot be personally held responsible for any deficiency in the loss of a property due to foreclosure or other factor, and the lender generally can't pursue a deficiency judgment.

The foreclosure process can take place in two different manners. Either the lender will invoke its powers of a private trustee's sale, which are given under the deed of trust, or it will bring a lawsuit for a judicial foreclosure, pleading that it has a deed of trust against the property, that you have defaulted on the loan secured by the deed of trust, and that the court should therefore order the deed of trust foreclosed and decree that the property be sold to pay off the entire loan debt.

A private sale is much better for the lender due to the faster timeline for completing the sale, unless the property lacks sufficient value to pay off the borrower's entire debt. However, in some cases, the judicial foreclosure is better because it allows the lender to obtain a personal judgment against the borrower for the outstanding amount owed on the loan after the foreclosure sale. This outstanding amount is called the deficiency, and the judgment against the borrower is called a deficiency judgment. However, a lender cannot obtain a deficiency judgment if the underlying debt arises from "purchase-money loan," which is either a "seller carry-back loan" or a third-party purchase-money loan for a owner-occupied residential property that has no more than four units.

A lender cannot get a deficiency judgment if it forecloses by private sale, nor can it do so if the underlying loan was a purchase-money loan. Therefore, a lender will choose to sell the property at a private sale if (1) the sales proceeds will pay the entire loan or (2) the loan was a purchase-money loan. However, sometimes the lender may choose a private sale due to the speed and convenience of the process, even if the property will likely yield a loss.

For further discussion, please see:

http://www.learnaboutlaw.com/deficiency-judgement-anti-deficiency-laws-california-and-elsewhere
http://www.realestatezing.com/usa/california/deficiency-judgment.html
http://www.cmabrokers.org/quarterly.php?a=view&id=108

The following is a CA statute:

580b. 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.
Where both a chattel mortgage and a deed of trust or mortgage have
been given to secure payment of the balance of the combined purchase
price of both real and personal property, no deficiency judgment
shall lie at any time under any one thereof if no deficiency judgment
would lie under the deed of trust or mortgage on the real property
or estate for years therein.