Wednesday, July 27, 2011

What is a Purchase Money Loan?

Arizona, as you know from reading this blog, is an Anti-Deficiency State. That means, in certain situations, when a bank loans money for the purchase of the house, the bank's only collateral (or recourse) is the house itself. In other words, if I borrow $100,000 from the bank to buy a house, and lose it to a foreclosure for only $50,000 - the bank cannot pursue me for the $50,000 I never paid back.

As you also know from reading this blog, the key to having this protection is the loan must be what we call a "purchase money loan" - the loan used to "purchase" the house. One of the most prevalent questions we hear is, well "what if I refinanced my first loan and took out extra money to improve the house, does that count?" Unfortunately, we do not know that answer for sure. The law on the books, as of today, does not give us a definitive answer as to whether a "cash-out refinance," in which the refinanced portion is put back into the house, would still be considered purchase money. That is just another challenge of dealing with these issues - we cannot definitively answer all the burning questions.

But, one thing we/you can do, is complete a short sale of these "cash-out refinanced" loans and ask the lender to waive any deficiency from the refinance. If the lender agrees to do so, then no worries!

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