Short Sale Vs Foreclosure - Have an approval letter with deficieny clause

Submitted by ravi from CA - 06/10/2010 - 2:26pm

I am trying to short sale my house in Roseville, CA. I refinanced the property about four years back. Now, it has two loans the frist one abt $390K and second one abt 95K). The second one is a HELOC. Both the loans are from BofA. I was renting the property for the last 3 years. Now it is empty.

BofA has given me an approval letter but with a verbiage stating that they may pursue deficiency judgment. I am debating whether I should accept the terms and short sale or let it go through foreclosure. If I go through short-sale (the short sale price is $310K), they may come after the difference in payment. In that case, can they come after both the loans or just the HELOC? If I go through foreclosure, will it wipe out both the loans or they can still come after HELOC?

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Comments

Submitted by Sean - 06/14/2010 - 10:12am

I'll give you my two cents, but would recommend you seek the advice of an attorney and an accountant before making a decision.

Because you refinanced both loans are full recourse, meaning they can come after you for any deficiency - that's not true for the original purchase money loan. That said CA does not allow the lender to seek a deficiency judgement if the lender pursues non-judicial foreclosure thanks to the "one action" rule - and almost all foreclosures are non-judicial in CA. But that will only apply to the loan that is foreclosed on. Second mortgages typically don't foreclose, so you would remain liable for that loan.
Your only hope of completely eliminating the possibility of recourse would be to have the HELOC foreclose, then the 1st foreclose. Typically you'd do this by keeping the 1st current until the HELOC decides to foreclose... but there is good likelihood the HELOC simply won't foreclose so this may not work out.
Finally note that either after a short sale, or the foreclosure of the first mortgage, the deficiency you are responsible for is now unsecured and you may be able to have it discharged in Bankruptcy.
I'd try negotiating with BofA on the deficiency judgement verbiage... at least with a short sale you have the opportunity to negotiate.

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