Can the bank come after me for more money after a short sale?

California Homeowners have always been protected on “purchase money” loans

Traditionally, California has been an anti-deficiency, or non-recourse state when it comes to “purchase money” loans. Purchase money loans are loans taken out to buy a home, or residential property of one to four units. Purchase money loans can include second and third mortgages. If the loans were used to purchase a residential property, California homeowners are 100% protected from future deficiency judgments from their lender after foreclosure or short sale.

Prior to Senate Bill 931, California Homeowners were NOT protected on “refinance” loans

In the past, refinance loans were not included in California’s anti-deficiency laws. Refinance loans did not fall in the same group as “purchase money” and were considered recourse loans. Unlike purchase money loan, the lender can pursue a deficiency judgment against the homeowner, or borrower, after foreclosure or short sale.

Senate Bill 931 changes that: First mortgages, or first deeds of trust, on a refinance loan are now considered the same as “purchase money” loans and are non-recourse. Under the new California law, a homeowner’s lender can no longer pursue a deficiency judgment on a first mortgage of a refinance after foreclosure or short sale.

Difference between first and second mortgages

Second mortgages are generally excluded from the new law, but if the second mortgage was used to improve the property in some way, it would be included and considered non-recourse. Other uses, such as bill consolidation, or cash out, would be excluded, and the homeowner may be legally liable if their lender decides to pursue a deficiency judgment. In a short sale transaction, lenders usually will waive their right to pursue a deficiency judgment in the future.

Expert advice about short sales

If considering a short sale of a refinance loan on a residential property that includes a second mortgage, consult with a knowledgeable real estate attorney about deficiency liability.

If considering a short sale and later tax consequences, it is broker advised to consult with a licensed tax preparer, or tax attorney.

For more information:
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation (IRS website)

Information from California State Franchise Tax Board