How best to get out of a mortgage on my vacation condo without incurring a deficiency judgement?

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How best to get out of a mortgage on my vacation condo without incurring a deficiency judgement?

I have a vacation condo on the Big Island that is well underwater with little chance of a sale or short sale. The condo costs about 15/20K a year as I rent it out but the rental market is bad also. I want to give the condo back to the bank but their only option is a short sale, but that won’t work because I have other assets and won’t qualify. While I can afford the payments now, it is depleting my retirement assets with no end in sight. I am afraid of a deficiency judgment in foreclosure and want to avoid it.

Asked on June 5, 2011 under Real Estate Law, California

Answers:

Mitchell Sussman / Mitchell Reed Sussman & Associates

Answered 9 years ago | Contributor

Hawaii does not have the same laws as California. In Hawaii the lender can seek a deficiency.

You should try and work with the lender on a short sale and make sure that an attorney reviews the documents so that it provides by contract that you will not be responsible for the deficiency.

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

It appears that California (the state your question is posted from) protects people from deficiency judgments for purchase-money judgments on their residences; it's not clear that this would apply to you in the case of your "vacation condo," but it's worth looking into. You should consult with a local real estate attorney to see if you do, based on the specifics of your case, have any protection from a deficiency judgment. (Note that Hawaii, which is what your comment about the Big Island suggests, does not have any such protection and allows deficiency judgments, so if sued in a Hawaiin court, you'd not have the benefit of CA law.)

If you do not have any protection, such as discussed above, then there is no other way to protect yourself--IF you walk away from or default on a mortgage, then if there is a remaining balance after the property is sold after foreclosure, the lender may go after you for it. As a practical matter, they often do not, especially if the amount is relatively small (a few thousand dollars underwater; maybe even $15k to $20k or so)--but they have the right to do so if they want. There is no way to prevent them from doing so, though you could then file for bankruptcy.


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