Foreclosure Article


FORECLOSURE DEFICIENCIES IN ARIZONA: Will I still owe money after a foreclosure?

FORECLOSURE DEFICIENCIES IN ARIZONA

Will I still owe money after a foreclosure?

 

It is possible for a borrower to still owe money after a foreclosure. One of the most common concerns borrowers have is whether they will still money on their home loan or loans secured by their home, otherwise known as a deficiency. The bad news is that it can be difficult to determine, the good news is that Arizona has broad legal protections that will prevent many borrowers from owing money after the foreclosure due to a deficiency. This article is a guide to deficiency and more specifically anti-deficiency statutes, while it is intended as a helpful resource, it is wise to consult an attorney for advice on a specific case. Additionally, there are other instances where borrowers may owe money following a foreclosure, such as “waste to property” or HOA (Home Owners Association) dues.

 

What is a deficiency?       

A deficiency occurs when a home is sold through foreclosure (judicial or trustee sale), the sale price is less than the amount owed by the borrower/homeowner, and the borrower does not qualify for protection under Arizona’s anti-deficiency statutes.

 

What are anti-deficiency statutes?

Anti-deficiency statutes protect borrowers from having to pay the balance of their home loan that is secured by the property with a mortgage or deed of trust, provided they meet the requirements of the statutes.

            Example: John and Jane Doe take a home loan for $200,000 to purchase a house. After living in the home and paying their mortgage something happens making them unable to pay their mortgage, the house goes into foreclosure (either a judicial foreclosure or trustee sale), and is sold. At the point the house is sold, John and Jane owed $150,000 on their loan and the sale price of the house is $100,000. This would leave a $50,000 gap in the sale price from foreclosure or trustee sale and the amount the owed on the loan, which would normally be considered a deficiency. However, John and Jane meet the requirements of anti-deficiency statute that applies to their specific type of foreclosure (judicial or trustee sale), which means there is in fact no deficiency under the law and John and Jane do not have to pay the $50,000 gap amount.

What are the requirements of the anti-deficiency statutes?

There are two anti-deficiency statutes in Arizona, A.R.S. § 33-729(A) for judicial foreclosures, and A.R.S. § 33-814 (G) for trustee sales.   The statutes are almost identical. To be eligible for protection, both statutes require the property to be 2 ½ acres or less and utilized as a one or two family dwelling. (Note: In cases where the home is not yet built but where the loan was obtained to purchase the property and build a house, the law has been interpreted to protect borrowers that intend to utilize the house as a one or two family dwelling). The distinction between the statutes is that for a judicial foreclosure, the anti-deficiency statute will only protect loans that are obtained to pay all or part of the purchase price of the property, sometimes referred to as a “purchase money loan.”

  • A.R.S. § 33-729(A): Anti-Deficiency Statute for Judicial Foreclosures

    • Property is 2 ½ acres or less

    • Utilized as a 1 or 2 family dwelling

    • AND the loan was secured to pay all or part of purchase price

  • A.R.S. § 33-814 (G) Anit-Deficiency Statute for Trustee Sales

    • Property is 2 ½ Acres

    • Utilized as a 1 or 2 Family Dwelling

What’s the difference between a judicial foreclosure and a trustee sale, and how do I know which one will be used?

In general, a foreclosure itself is the process by which a lender, repossess the house or property that is the security/collateral for the loan. In Arizona, there are two types of foreclosure: Judicial and Non-Judicial/Trustee Sale. 

A judicial foreclosure, is a foreclosure by court action, similar to other common civil actions where one party sues another (i.e. bank files a lawsuit against the homeowner).     (A.R.S. § 33-721). A non-judicial foreclosure is a foreclosure that does not require a court action, in Arizona non-judicial foreclosures are called “Trustee Sales.” (A.R.S. § 33-807).  The lender chooses which foreclosure process to use, however trustee sales are the preferred method as it allows the lender to take possession of the property and sell it more quickly. A trustee sale may commence after the 90 day notice period has expired, where a judicial foreclosure can be as lengthy as any other court case and take up to a year or more. One of the reasons Arizona has a broad anti-deficiency statute, is in part as a tradeoff for lenders being able to foreclose more quickly through a trustee sale. 

 

What if there are multiple loans secured by the property such as a second mortgage or home equity line of credit (HELOC)?

This is where anti-deficiency protections get more complicated, and where borrowers normally find themselves paying a deficiency. These are the types of situations when it is even more helpful to consult with an attorney as it may be difficult to determine if there is a deficiency.  An attorney will need to look at the loans and the loan documents (mortgage, deed of trust, or promissory note), the purpose of the loan, and where each lender ranks in priority or position if there are multiple lenders. Priority or position of a lender in relation to other lenders means that one lender has superior rights over another, to receive money from a foreclosure or trustee sale as it provided a loan and received a deed of trust before another lender.

The loan documents are important because they will dictate the lender’s legal options, including what foreclosure process may be used, and which if any anti-deficiency statutes apply. A mortgage can only go through the process of a judicial foreclosure, while a deed of trust may go through either a judicial foreclosure or a trustee sale. A mortgage secures the loan by giving collateral in the property; a deed of trust allows the lender to foreclose through a trustee sale. Promissory notes are the typical documentation that secures a debt, such as general loans or lines of credit. 

The anti-deficiency statutes will protect the borrower from deficiency where the property is 2 ½ acres or less, the home is utilized as a single or two family dwelling, and for the purpose of judicial foreclosures, the loan was secured to pay part or all of the home purchase price (i.e. purchase money). In a less complicated scenario this would mean if the loan instrument was a deed of trust, and the property is foreclosed on through a trustee sale, there would be no deficiency even if the loan was not for the purchase of the home. 

When multiple loans are secured by the home, it is possible for the borrower to still owe money on a loan where a deed of trust was issued to the lender, and where the home was sold through a trustee sale. This might happen if there are multiple lenders for multiple loans, the lender highest in priority (first or senior position) forecloses on the home, and the deed of trust is legally extinguished for another lender lower in priority (second or junior position).  The lender in lower priority (with the deed of trust extinguished) could then bring a law suit on the one of the other instruments (mortgage or promissory note). However, the borrower may still be protected from a deficiency.

When a lender sues the borrower on a home loan that was originally secured by the property, the anti-deficiency law still applies if the loan qualifies as “purchase money.” This means a borrower with two loans or more loans that were obtained to pay for the property, will have no deficiency if the property is 2 ½ acres or less and utilized as a single or two family dwelling.

As a general guide, if each loan secured by the property was used to purchase part or all of the house, and the property is 2 ½ acres or less and utilized as a single or two family dwelling, the borrower will most often not be liable for any deficiency.

 

What if I have a deficiency?

If there is a deficiency, after the trustee sale the lender must file a complaint (file a lawsuit) within 90 days of the trustee sale. (A.R.S. § 33-814(A)). Additionally a borrower may find relief in other legal option such as a bankruptcy which may discharge any lingering debt from the foreclosure.

 

What about “waste” and HOA fees?

The borrower/home owner is always liable for waste or intentional damage to the property. (A.R.S. § 33-806(B),  A.R.S. § 729(B)). Additionally, Home Owners Association (HOA) fees are often overlooked by the home owner, these fees may continue to accrue until the property is legally transferred out of the borrower’s name. This means, that even though the property may be going into foreclosure, the HOA fees will continue to come due, and the borrower/home owner will be responsible for the fees until the foreclosure is completed. HOA fees are not subject to the anti-deficiency statutes, they may however be discharged in a bankruptcy.

 

Where can I find legal help?

AZLawHelp has legal resources that may help, they are listed in the “Legal Assistance” section and on the right column of the AZLawHelp. There is also a link to an online application for legal services under the LegalLEARN section. 

 

 


Comments:

QUESTIONS

  • The house we rent is in foreclosure. Are we obligated to stay in the house for the 90 days allowed or can we move as soon as we find a new place to live? Can the landlord hold us to the terms of the lease even though the house is in foreclosure now? Can he take us to court if we move out prior to the end of the lease?
  • I have a 3plex in AZ that is about to go into foreclosure. I was told by an Attorney that if the lender does not come after us with in 90 days of the foreclosure date by law they cannot come after us in other words sue us. Is this true?
  • The question concerns anti-deficiency laws in Arizona (non-recourse state) in regards to foreclosure? I am trying to determine if they are different for owner-occupied and non-owner-occupied residences in Az? If there is a deficiency in the foreclosure, can I be sued as a non-occupant owner for a deficiency.
  • We lost our home a year and a half ago through foreclosure. They had strung us a long promissing to help, we didn't know there was other help out there. Is there a way to get the home back (it's not sold), is there any type of assistance for people who are already "homeless" We got a notice for settlement payment - is this our only option for assistance?
  • My father passed away in September, 2016. I am the executor of his estate and I have a lawyer representing me and the estate. His house is paid off but he has a 7,000 home equity line of credit. There is no money in the estate to pay any bills except the utilities. It is for sale and hopefully will be sold soon. I received an Act 91 notice. Can a house be foreclosed on that is in probate? There is no money to pay the home equity line of credit bill or the taxes owed till the house is sold
  • There is a scam going on with my house and reference for foreclosure need legal assistance ASAP I am disabled and need help my phone number is I need immediate help. Thank you
  • In the dot com recession, my IT job disappeared. I had to refinance my home. My son signed the new mortgage because I needed his income to qualify. I have since wished he could be removed but couldn't refi because property values fell. Now my job has once again disappeared and I am facing foreclosure. I am applying for assistance thru SaveYourHome. My mortgage counselor tells me that I would easily qualify except for the co-signer. In the past 2 yrs, my son has gone thru a BK & lay-off. He's been at his new job 9 months makes $13 per hour. I've heard about Quit Claim deeds. Can he be removed?
  • how long does the foreclosure process take before you're kicked out of your home completely?
  • The house is currently in foreclosure.It is being sold at an auction in January.Will they give me a notice telling me I have to get out? Or can they by law,put my stuff on the curb?
  • I bought a condo in July 07' using funds from a City of Phoenix bond program. I was unaware of a stipulation stating that the owner must occupy the unit for the life of the loan. I was laid off from my employer and I have had to relocate to Texas for work. Now the mortgage company is stating that they can accelerate the loan pay-off requiring me to pay the loan in full. I pay my mortgage payment each month, how can they do this?

STORIES

  • He told me that I could actually get all the money I needed by using my home as collateral. . .
  • I just helped my mother, age 89, deal with her Medicare HMO. . .
  • He told me that I could actually get all the money I needed by using my home as collateral. . .

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