If your property is located in a non-recourse mortgage state, and if you default on the mortgage, the lender may not sue you for the deficiency if the foreclosure does not generate enough proceeds to repay the loan.
Non-Recourse States include:
Alaska, Arizona, California, Connecticut,
Idaho, Minnesota, North Carolina,
North Dakota, Texas, Utah, Washington
However, each non-recourse state has its own anti-deficiency laws that prohibit lenders from seeking deficiency judgments. In some states, the statues only apply to certain loan types. For instance, in California, the laws only protect the borrowers with the "purchase money" loans. This means that the loan must be used to purchase the property. Therefore, mortgage refinances does not meet the requirement.
Most states' anti-deficiency statutes also protects only homeowners, which generally mean the properties were occupied as primary residence at least six months prior to foreclosure proceedings. Better news for Investors or second home owners - some lenders don't pursue judgments all together in non-recourse states. It does not worth the resources (attorneys, staff, offices, etc) for lenders to take few investors and second home owners to the court.
Foreclosure or a trustee sale, as compare to short sale, may also reduce your chance of being sued in non-recourse states. This is especially true in "One Action States" (or "Single Action States") which will be discussed in more details later.
In summary, you are best protected when your property:
- was located in one of the non-recourse states
- was a primary residence
- loan was the original purchase loan (not refinanced)
- was foreclosed (trustee sale)
The best advice we can give now is to seek professional legal help that is specific to your state and your situation; And always negotiate away deficiency judgment with your lender before proceeding.