Your Contractual (and Moral) Obligation When Buying Real Estate

In most instances when someone buys a home, at their own free will, they sign a large assortment of documents, including a promissory note and a deed of trust.  Does the homebuyer have a moral obligation to honor the loan commitment?  Yes, but not in the way some view this.

The note and deed of trust essentially require the homebuyer (now the homeowner) to pay X amount per month for each consecutive month, in an amortized amount, over the life of the loan (usually 30 years).  This can vary in some cases, but the payment obligation is virtually the same in all cases.  According to the loan docs, it the homeowner fails to make the required payments, the lender, who also freely entered into the agreement, can declare a default and call the loan due.   The lender is entitled to, and often does, foreclose.

In the loan docs, notably the note and deed of trust, the homeowner has agreed to give the property back to the lender if the lender proves the homeowner did not fulfill the payment obligation.  When the lender forecloses on the property and the homeowner leaves the property or home, the homeowner has fulfilled his or her obligations under the loan. 

In short, the homeowner agreed a) to pay the loan back to the lender, or b) to give the property back to the lender.  When the latter option is excercised by the lender, the homeowner, unless he or she tried to stop the latter option from happening for no real reason, has ethically performed according to the loan agreement with the lender.  The contractual obligation and the moral obligation was fulfilled, just not in the manner the lender ideally hoped for when they freely signed the loan docs.
Remember, the loan docs do not state that the homeowner has to pay the loan amounts under any specific conditions, such as if he or she has adequate money to pay, or doesn’t have money to pay, or when the property is underwater or not.  It just says the homeowner has to pay, and if he/she doesn’t, the lender gets the house back. 

There are related consequences that the homeowner, when he/she signs the loan docs, agrees to as well.  California is not a recourse loan state, so first deeds of trust do not come back to homeowners in the form of a deficiency judgment.  However, the homeowner will suffer some form of credit repercussions, which is part of the deal.   A contractual obligation and a moral obligation, both which the homeowner, when defaulting on their loan and giving up the property, has satisfied in full.


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