Underwater on your vacation or rental property? Consider the consequences of a strategic default, and some alternatives, before you make the decision to walk away.
Mortgages on second homes and rental properties are recourse loans. When you default on a recourse loan, lenders are able to pursue you for the difference between your outstanding principal mortgage balance and the price the property fetches at a foreclosure sale. In addition to losing the property, you may find yourself on the hook for any leftover mortgage debt – and lenders can go after your personal assets to cover it. [California Code of Civil Procedure §580d(b)]
Before walking away from your negative equity resort property, consider some other options:
- Contact your lender to negotiate a loan modification, principal reduction, deed-in-lieu of foreclosure or other remedy. The lender is not required to oblige, but a good-faith effort can’t hurt.
- Consider a short sale. California anti-deficiency law prohibits a lender from suing a homeowner to recover any deficiency after they’ve agreed to accept a short payoff on a one-to-four unit residential property. [CCP §580e(a)(1)]
- As a last resort, consider Chapter 13 bankruptcy protection if the potential deficiency judgment on your property is very large. Debt restructured and reduced in a Chapter 13 filing is required to be repaid in five years.
If you do decide to strategically default on your vacation home or rental, your lender can only pursue you for the difference if they choose a judicial foreclosure, rather than the standard nonjudicial foreclosure, or trustee’s sale. After a judicial foreclosure auction you are also entitled to redeem the property by paying off the debt within one year. [CCP §729.030(b)]
If you’re seriously underwater on your resort property, you have options. Call me today and we can find a solution that works for you.
