Unfortunately, for a lot of homeowners, that might just be case. If you’re one of the homeowners who has had his home foreclose due to lack of mortgage payments, there is a chance that in the state of California the lender may be able to sue you for the difference the home is currently worth and the mortgage amount. This can happen only if you have refinanced the home since you bought it.

Currently, if a homeowner defaults on a mortgage used to purchase his or her home – called a “purchase money mortgage” – the homeowner’s liability on the mortgage is limited to the property itself. Unfortunately, the original law did not extend the purchase money protection to loans that refinance the original purchase debt, even if the refinance only was to obtain a lower interest rate.

Californians who refinance a property currently do not have protection if they default on a mortgage greater than the property’s value. Called a “deficiency” liability, under current California law, the lender can sue the former homeowner for the amount of the deficiency even after taking back the property. This is also called a deficiency judgment.

The California Association of Realtors is sponsoring a Senate Bill to close this loophole. We’ll keep you posted. For more details on the SB 1178 go here.

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