California Short Sale Guide: Deficiency Protection and Selling Underwater

Last updated November 13, 2026. Reviewed by the Cash Home Buyers CA team. Based on California Code of Civil Procedure section 580e as published by the California Legislature; sources are listed at the end.

In California, when you sell a one-to-four-unit home in a short sale with your lender’s written consent, Code of Civil Procedure 580e says no deficiency is owed or collected on a note secured solely by a deed of trust or mortgage on that dwelling. A short sale means the home sells for less than you owe.

This guide explains what section 580e protects, what it excludes and how to sell a house in California when you owe more than it is worth. It covers short sales only; deed-in-lieu rules are not summarized here, so ask your lender and an attorney about that option.

California short sale deficiency rules at a glance

What is a short sale?

A short sale is a sale of your home for less than the remaining loan balance, approved by the lender. Because the lender is accepting less than it is owed, the lender must agree in writing before the sale closes. Section 580e then protects you from being pursued for the shortfall on a covered loan.

• The protection applies to a note secured solely by a deed of trust or mortgage on a home with no more than four units.
• For notes secured by more than that, section 580e(a)(2) says no judgment is rendered for a deficiency and the parties’ rights are treated as if the property sold by foreclosure under a power of sale for the sale price.
• The lender cannot require you to pay anything more than the sale proceeds in exchange for its consent.

Who is not covered by section 580e?

The statute does not apply when the borrower is a corporation, limited liability company, limited partnership or political subdivision of the state.

It also excludes certain loans, such as those securing bonds or evidence of indebtedness authorized by the Commissioner of Financial Protection and Innovation, and loans made by a public utility under the Public Utilities Act.

If you hold the home in an LLC, section 580e may not protect you, so get legal advice before you agree to a short sale.

How to sell a house in California as a short sale

1. Confirm the loan type. Check whether one note is secured solely by a deed of trust on your one-to-four-unit home.
2. Contact the lender in writing. The sale must follow the lender’s written consent.
3. Do not agree to extra payments for consent. Section 580e(b) bars the lender from requiring compensation beyond the proceeds in exchange for consent.
4. Make sure title transfers properly. Title must be voluntarily transferred by grant deed or another recorded conveyance, and the proceeds tendered as agreed.
5. Be accurate in what you tell the lender. Fraud or waste with respect to the sale lets the lender use its existing remedies.
6. Compare your options. A direct cash offer may cover your loan if the house is worth enough, and a lender can tell you what it will accept.

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Thinking about a short sale? Call (424) 435-2326 or request a cash offer. There is no cost and no obligation.

Short sale FAQ

Do I owe the difference after a California short sale?

For a covered loan, no. Section 580e(a)(1) says no deficiency is owed or collected on a note secured solely by a deed of trust or mortgage on a dwelling of up to four units when it sells for less than the debt with the lender’s written consent.

Does the lender need to approve the short sale?

Yes. The sale must follow the written consent of the holder of the deed of trust or mortgage.

Can the lender make me pay extra to approve it?

No. Section 580e(b) says the holder cannot require compensation other than the sale proceeds in exchange for written consent.

Does section 580e protect an LLC that owns the home?

No. Corporations, LLCs, limited partnerships and political subdivisions are excluded.

Can I waive these protections?

No. Section 580e(e) says a purported waiver is void and against public policy.

Sources

• California Legislature: Code of Civil Procedure section 580e

This guide is general information, not legal advice. Confirm how section 580e applies to your loans with a California attorney or HUD-approved housing counselor.