A purchase-money lien is created by a deed of trust given to a lender to secure repayment of a loan which was used to pay all or part of the purchase price of real property. A purchase-money loan in which the proceeds were used to provide all or part of the purchase price of an occupied dwelling for not more than four families is entitled to antideficiency protection in the event of foreclosure. (California Code of Civil Procedure section 580b.) This means that if the lender forecloses but recovers less than the amount due on the loan, the lender may not hold the borrower liable for the remaining balance.
But what if the use of the property changes between the time of its purchase and the time of the foreclosure? This question frequently arises in situations where the property is a single-family residence. The basic scenario is that the borrower purchases the property, lives in it for a period of time, and then moves out and changes it to a rental property. Under such circumstances, does the borrower lose the antideficiency protection?
The answer to this question is no. Under the circumstances described, the borrower continues to have antideficiency protection even if the borrower no longer lives in the property at the time of the foreclosure.
The clearest case applying this principle is DMC, Inc. v. Downey Savings and Loan (Cal.App. 2002). DMC involved a dispute between two lenders with respect to the priority of distribution of foreclosure proceeds. Part of the analysis of the court concerned whether the status of the loan changed because the borrower no longer lived in it at the time of the foreclosure. On that point, the court in DMC held that “the facts and circumstances that exist at the time the debt is created determine the character of the obligation as a purchase-money mortgage.”