A deed in lieu (DIL) can be a good alternative to foreclosure, but lenders sometimes pursue homeowners for negative loan balances known as deficiencies. However, some states bar lenders from pursuing homeowners for deficiencies when they accept DILs from them.
California’s Anti-Deficiency Laws
It seems unfair for a lender to agree to take your deed and your home instead of foreclosing and then pursue you for negative loan balances. California has anti-deficiency laws, sometimes called single-action rules for after DILs that regulate lenders and their deficiency recovery practices. For example, a lender-accepted DIL ends a mortgage loan and also prohibits lender deficiency recovery actions in the future.
Single-Action Rule in a DIL
A single action in a DIL situation means that your lender’s acceptance of your proposed DIL ends your responsibility for the loan’s repayments because by taking your DIL and your home the lender agrees under law to close the mortgage loan, writing off any deficiencies. Single-action rules, also called one-action rules, on DILs add to a state’s anti-deficiency protection for mortgage borrowers, but anti-deficiency laws may not apply to certain types of mortgages.
Exemptions for Anti-Deficiency Status
California law defines what mortgages qualify for anti-deficiency status. Your DIL may not end attempts by any other mortgage-type lienholders who are pursuing you for deficiencies after your DIL. Second mortgages not directly used to purchase or improve borrowers’ homes do not qualify for anti-deficiency status. Also, if you refinanced your mortgage loan your subsequent DIL would not exempt it from any deficiency recovery actions your lender may take.
Negotiation a DIL and Lender Promises
When negotiating a DIL, you should always obtain, in writing, any promises of forgiving any post-DIL deficiencies that your mortgage lenders may give.
Source: SF Gate, The California Anti-Deficiency Statute on Deeds in Lieu, 2014