Loan Refinance…Think Again?

By Raymond Stoklosa · March 20th, 2009

San Mateo mortgage

Purchase Money Loan Protection

One of the least known pitfalls of refinancing involves the concept of personal liability when a homeowner defaults on their mortgage. It relates to a provision in the law called the Anti-Deficiency Statutes. The law basically says that when a buyer borrows money to purchase real estate consisting of one to four residential units with at least one owner occupied unit, the foreclosing lender must accept the property as the sole security for the note.

Protection Against Predatory Lenders

In other words, if the home owner obtained an owner-occupied loan from an institutional lender and defaulted, the lender cannot pursue the borrower’s other assets should the property be worth less than is owed. This provision created back around 1937 is designed to protect homeowners from predatory lenders. Yes, they had predatory lenders then too!

Lender’s Rights in a Purchase Money Foreclosure?

Let me give you an example: A homeowner, who buys a home for $500,000, borrows $450,000 and puts a $50,000 down payment defaults on their original loan and the lender forecloses. At the time of the foreclosure the home is worth $400,000. Sound familiar? The lender gets the property back, but is not allowed to go after the homeowner/borrower for the $50,000 loss the lender incurred. The homeowner’s other assets – stocks, bonds, gold, antiques – are protected by a legal firewall. Of course, if the borrower committed fraud (e.g. lied on the loan application) when applying for the loan, the Anti-Deficiency Protection does not apply.

What Happens if I Refinance My Loan?

Now, the Anti-Deficiency Protection does not apply to a refinance loan. Since the money borrowed on a refinance is not purchase money – it is not used to buy the property – the Anti-Deficiency Law is not applicable. When you refinance, you as the borrower have full personal liability for the payment of the note. The lender can and probably will seek full repayment of the entire balance, interest and penalties, including legal fees, even if that means going after your other assets – stocks, bonds, gold, antiques, etc.

Know All the Facts to Make an Informed Decision

Put simply, you have full personal liability exposing all of your assets when you refinance, so do so with care. There are right and wrong reasons to refinance your loan. Discuss your personal situation with a trusted, reputable lender like our Co-Author, Chris Williamson over at the San Mateo Mortgage Blog. He will analyze your financial picture and provide you with a all the information so you can make an informed decision. Borrowed money is like any other tool. It can be used prudently with a positive effect and it can be a frivolous prescription for financial disaster.

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