This is a legal question that has specific answers based on the mortgage you sign and your geographical location of the property. Is the new purchase with a non-recourse mortgage? If I were in your shoes and you are already concerned about defaulting on the new mortgage, strongly consider selling your existing home and applying the proceeds appropriately. Don't go into a new house planning to default. It's a bad idea and takes years to recover. Speak to an attorney and a financial planner.

Edit: Remember, California is a community property state. You will want to discuss this with the attorney and the financial planner as to the effect it has on your assets and your debt.

Exactly. You need to discuss this with a real estate attorney. Why not sell your first house & apply the proceeds to your new one?

If you cosign the loan then you are responsible if you don't pay the mortgage. They absolutely will go after your assets if you default. That is what cosigning means. Foreclosure is the last thing people think about when buying a house. I know this isn't Dr. Phil and it's a home interior site but you really should give this thought. If things go south she is going to have to refinance the house in her own name. That's the only way to get you off the loan. She obviously can't afford the house and the bank knows that. That's why they have you.

cbear33 is correct on all accounts!

I am not sure that cbear33 is correct on all accounts.

California is a non-recourse state on home purchase mortgage notes, furthermore, they are a single action state.

That means that if a bank in California forecloses on a house they can't pursue any action against a buyer or cosigner of the mortgage. So generally, in California if they foreclose on a purchase loan they can't attach to any other properties. These rules often don't apply to refinancing, second mortgages, and certain cash out loans. Now, since they are a non-recourse state, they don't have to foreclose, they can sue the signer or cosigner and get a judgment for the amount of payment.

But, California is a single action state. Which means that banks get one bite at the apple. If they file suit against the homeowner or the cosigner for collection of the note, they lose the right to foreclose. They can either foreclose or sue to honor the loan, they can't do both.

You should get specific legal advice in your area as there are certain nuances to California mortgage notes, so it is a good idea to spend a few hundred dollars on an attorney to ensure that the note conforms to the standard required (most California mortgage notes for home purchases do).

I'm so glad I work my butt off and never had to deal with this junk. At the mercy of the bank. I have 4 properties and paid cash for all of them. This also got me sweet deals. But yeah this is a legal question, why you on here asking? lol

I'm so glad I work my butt off and never had to deal with this junk. I have 4 properties and paid cash for all of them. This also got me sweet deals.

I just bought two more investment properties and I keep them mortgaged. I paid cash for both properties with the levered investment I got from other properties and immediately refinanced them with a mortgage.

I try to keep everything other than my primary home mortgaged to the hilt. So to each their own.

You probably do that so you don't need a license when flipping houses. When their mortgaged then they were never technically yours. Nice loop hole lol,

First, I don't flip houses.

Next, what in world are you talking about? Yes you own the house when you mortgage it, it is technically yours. I have no idea what you are talking about as far a loop hole goes.

I am talking about a leverage. It is financing 101. Instead of paying cash you get a mortgage at 4.5%, you then invest the money into some type of investment that yields better than 4.5%. Five years ago I pulled out $500,000 of equity from properties (it was standard real estate appreciation) I invested that in a Vanguard mutual fund. Tenants are paying the mortgage for me, while the equity that was sitting in the house doing nothing got used in a mutual fund has grown by $503,000 at a cost of $81,550 in mortgage interest.

ETA: I would like to avoid the risk discussion that seems to happen every time I talk about this. Houses are more risky than properly diversified equity portfolios. They lose money more often, have less liquidity and must be liquidated in full rather than partial.

I don't like people borrowing money they don't have and can't afford to pay. However, if you can afford to pay cash a mortgage is great tool.

Bry611, sorry, forgot we were talking about California, their rules are always different, I stand corrected.

Bry911. So if I understand that correctly, you are saying the State of California can either sue you personally or foreclose but they can't do both. (I'm just trying to understand this). So, if you bought a 300,000 home and default, they will just sue you personally. (They don't want the house anyway; they want their money. dejavu 2008) That in turn would allow a judgement against you for 300,000 which would then allow the bank to garnish your wages and put levies on your bank account. I would think the person who posted would have to sell his other house to pay off the judgement to the bank. In a one bite of an apple law they will take the biggest bite which gets them their money back.

No Tony, it belongs to the people/entity on the deed. The note, if any, is the amount that was borrowed against the property and the mortgage is the lien on the property for the amount borrowed (simplistic explanation). That's why banks go through the foreclosure process if the owner stops paying on the note. The mortgage allows the lender to foreclose and then sell the property to satisfy the mortgage if the owner defaults. The bank can't sell it if they don't own it but the bank has to go through the entire foreclosure process to own it. If the sale of the property won't satisfy the amount due, then the lender can go after the debtors as a general rule for the rest.

However, California is different in that it is as Bry611 mentioned: a single action state.

@ cbear33

I don't think it is quite as simple as saying the bank will do X. Currently the bank has a secured loan and I suspect the bank is going to be incredibly reluctant to turn a secured loan into an unsecured judgment. Remember that 20% of the loan is protected by down payment or down payment inurance, the bank essentially gives that up in pursuit of a judgment, as they lose the right to force the sale to access it.

I bet they very rarely choose to forego foreclosure in pursuit of a judgment. There are just too many ways to screw the bank out of their money for it to be worth the risk.

ETA: Having said all of that, it is still up to the bank and I wouldn't bet too much on it.

Tony,

IIRC, you are in a business that does not pay taxes. Real estate investment often takes advantage of tax law.

A mortgage is a contract that allows the bank to seize certain property if you default on a note. Legally speaking, you can't grant rights to someone else's property, so a mortgage would be invalid if the bank owned the property.

Furthermore, this has nothing to do with your earlier statement. I know no way to avoid a transactional or business license requirement by declaring you never owned a property because it had a filed lien. Furthermore, if someone walked into my office suggesting this set up, I would be very wary of working with them.

In full disclosure I got pretty bummed on real estate a few years ago. I am still really not a fan of real estate over equity investments.

Thanks for the explanation Bry911. I'm so thankful for the troubles I don't have.

Cbear, in CA, banks almost always go after the collateral, i.e., the house. They figure that if you had the resources, you wouldn't be failing to make payments.

Of course the homeowner is on the deed because that is who owns the property, not the mortgage holder. The mortgage is a financing device, not ownership. It is a contract with requirements for each party and when the contract is satisfied, the mortgage is released. For a car, the title is the ownership document but having a property deed does not mean that a person can change ownership by handing that deed to another person. The ownership is recognized by recording the deed and the mortgage is recorded also against that property identification number or PIN. Once the ownership is recorded, that deed is not used for any subsequent sale or transfer

@ Tony Montana - I really want to be nice to you, but almost everything you type is wrong.

Ever fill out a credit card application or something? Sometimes they ask "Homeowner" or "Mortgage". They ask this cause if you have a mortgage you don't "OWN" anything.

Why would anyone who is going to run your credit, need to ask you whether or not you have a mortgage note? They will get that information right off your credit report. The purpose of the question is to then ask you about your house payment in order to establish your debt to income numbers. Credit card companies will often use different factors in establishing debt to income on rentals and owned homes.

Same with doing payments on a car. You don't get the title until you pay off the car. Until then, you don't own it.

You do own the car, you keep asserting that there is some sort of mechanism for removing the rights and responsibilities of ownership, because someone else is on the title, or even holding it. It doesn't happen that way. In a car loan you assign certain rights to the bank in a contract in exchange for using their money, one of those is often possession of the title. However, that doesn't in any way change the ownership of the car to the bank.

If you don't believe me, take a bunch of parking tickets to the bank and let them know how much they owe the city. They will explain the difference to you as they are removing you from the premises.

Like I said, I bought my house and 3 apartment complexes cash. So I never had to deal with any of this legal mumbo jumbo. So I don't know to much about it.

Since we are dealing with legal mumbo jumbo now. If you have three apartment complexes that are not financed, you should spend some time getting decent and qualified legal advice and tax advice.

The first thing I do when I get a multi-unit property is mortgage it and then move it to an LLC. I would never have more than the minimum equity in a multi-unit property. There is far too much risk involved. I love the levered investment from property loans, but even without it, I would mortgage them anyway for the liability shield.

I've heard so many nightmare stories when people had closing on property. Like taking hours and signing a billion documents. I just walked in, signed a piece of paper, paid, walk out. lol

My last loan deal was for a solid chunk of change, it took 30 minutes and it happened in my office.

"Stop paying the mortgage and see whats happens. Its technically not yours."

Tony,

I thought if you are fuzzy about who owns the house and car, as soon as you stop making payments to the loans, you would clearly find out you are the owner of the house and car, and are responsible for the debts attached to both.

It seems you have been purchasing everything with cash, therefore you are not familiar with legality associated with mortgages and car loans.

Tony: there is no such thing as "if I borrowed my car to someone else". Do you mean if you loaned your car to someone else?

It is abundantly clear that you have no idea what "own" means and that a deed is the mechanism used for ownership for real property. A loan on the property does not mean that the lender owns the property. Please quit digging this hole.

A side recommendation: Get sufficient insurance on each of you to pay off the house should either of you pass away while the mortgage is still in force.

My tenants are a great example. They pay rent but still have to maintain the property and are responsible for any damage they have caused.

Everything you type is wrong. I mean like everything. Really just resist the urge.

Tenants are responsible for the terms of the lease and excessive damage to the property. In fact, tenants are less responsible for damage than a stranger off the street. If a stranger off the street walked into your property and caused an amount of monetary damage equal to normal wear and tear on a leased rental property he would be held financially responsible even though a tenant wouldn't be. Tenants have diminished responsibility to maintain your property and virtually none without the lease.

A mortgage is pretty much the same. Your paying rent until an agreed certain $X amount until its yours.

It isn't even close. It isn't that we don't understand your point, you don't need to give more examples, we completely see what you are saying. The problem is that you are WRONG. Not a little bit wrong, a whole lot of absolutely incorrect, and no explanation out there is going to make you right.

A mortgage creates certain obligations and if you want to be free of those obligations then you must pay off the note. Your assertion that an obligation subverts ownership is absolutely ridiculous. Someone might feel freer without that obligation, but I would argue that is nothing more than false assurance. Realistically, simply being born creates certain obligations and if you want to be free of those obligations then you must die. It doesn't mean you are not alive right now just because you are obligated.

Maybe it this mentality why so many damn Americans are in debt. They buy something on credit and actually think its theirs.

Realistically, your misconception of debt is probably more indicative of the problem with this country than any misconceptions about ownership.

Debt is a tool, and just like many tools, it can be used creatively or destructively. Give an experienced carpenter a hammer and watch him turn a pile of wood into something of significant use and value, however, give that same hammer to a 7 year old and set him free in something of use and value and watch the destruction.

Debt isn't the problem and it never has been, and the people who believe it is are just tiresome. Spending is the problem. There are lots of people who have debt and wealth, and there are lots of other people who have no debt and nothing to show for it.

Dear Arturo- This is a legal question for a California attorney who specializes in real estate. This is also a question you should ask yourself NOW:

Why are you already planning for a default on your new mortgage? This all seems a bit sketchy.

Consult a real estate attorney. You don't know what you don't know. A chat room is not the place to get specific legal advice. You need specific legal advice. There are simply too many variables. Buying one hour of a real estate attorney's time is a wise investment in your future. Do this before you do anything, not after. It will save you a world of trouble.

I cannot speak to the legal issues. I do wonder why you even ask; it's as though you do not trust your soon-to-be-bride on some level and are already thinking the worst. Perhaps you two should live in your current house until you get this figured out.

Maybe you need to consult a financial advisor rather than an attorney. If you and your fiancee dont have the assets and income to buy this house without financial stress, you shouldn't do it.

I hate the saying, but it seems applicable here. No one plans to fail, they just fail to plan.

I would never sign a note without knowing my exposure. Things happen, and the best way to protect yourself from those things having devastating effects is by addressing them before they happen.

Before I got married I moved my house into a protected legal entity so if we defaulted on her home, mine would be protected. Had we chosen to live in mine and rent hers, we would have moved her home into a protected legal entity.

No matter your financial situation if you have a mortgage and own two properties you should have each protected from default on the other. If you live in a state that doesn't extend protection by function of law, pay an attorney to help you.

Arturo Why are you purchasing a home that you are planning on defaulting on? If this is a mortgage fraud scheme you will have far greater worries than losing your first home. You could go to federal prison.

There are lots of reasons that multiple homes should be protected from attachment of other homes. There is nothing wrong with this question and there is LOT wrong with being bothered by it.

Are you all actually telling me that you would take mortgage notes on two homes without knowing how the liability extended between the two homes? If that is the case the OP isn't the problem.

There are many reasons that you might decide to default on a mortgage and it isn't only because you can't afford to pay, this is especially true if you live in California which is currently on a real estate bubble. Wanting to limit the exposure from the bubble popping is more than reasonable, it is prudent. I saw many people who had mortgages far in excess of their property's value in 2008, I have seen a tax assessment for double the value of a home, I have even seen a home that was built by a scam artist fall into a river. Many of those people chose to default on their mortgage even though they could afford to continue payments, because it was a smart financial decision.

I live in an area where many homeowners chose to do a strategic default on their mortgage. Most of the judgements were between $150K and $250K and the houses were selling for $40K to $60K at foreclosure. Many of the lower priced foreclosures were bought for cash and some of those buyers or their family members had let their previous house go into foreclosure and saved their money for buying a different house at a fraction of the price. The homeowners who were foreclosed on were left with large judgements against them so the new house was usually bought by a family member.

I just want to add that all states have laws that change the perception of certain things. Recourse vs. non-recourse debt is one of those things. If you live in a non-recourse state your view of mortgages is completely different. If someone in Chicago tells me they paid off their house I would think they are too risk averse. If someone in California pays off their house I think their risk appetite is too large.

In non-recourse states all of the substantial loss risk is borne by the lender. In recourse states it is shared, with homeowners having the lion's share.