Anti-Deficiency Statute

Homeowners who choose short sales as alternatives to foreclosure often wonder if they will be held responsible for the difference between the amount their house sold for and the amount owed on the mortgage. In most cases, the Arizona Anti-Deficiency Statute will protect homeowners from having to financially answer for the deficiency between the selling price and the amount owed on the mortgage. To further explain this process, the Pak & Moring law firm has published an article regarding this state-specific statute.

Arizona’s Anti-Deficiency Statute

When a homeowner defaults on their mortgage, the lender will generally begin the foreclosure process to “repossess and sell” the house with the expectation (or hope) that it can turn around and sell the home to pay off the mortgage that has not been paid by homeowner.  This amount will generally include the amount of the mortgage, as well as any late payments, lawyers’ fees, and administrative costs incurred during the foreclosure process.  In some cases, particularly in today’s real estate market, a lender may only be able to sell the property at a fraction of the outstanding mortgage obligation.  The lender generally loses money on the foreclosure.

An example:

A mortgage company loans a home buyer $150,000 to purchase a home.  Two years later, the homeowner fails to make the payments and the lender is forced to foreclose.  When the lender sells the property, it is only able to sell it for $100,000.  This results in a $50,000 loss for the lender.

In some states, the lender may be entitled to sue the ex-homeowner for the difference ($50,000 in the example above) and receive a deficiency judgment through the courts.  Thankfully, in Arizona, there are limitations to a deficiency incurred during foreclosure.

According to Arizona law, there exists an “Anti-Deficiency” statute that essentially prevents a lender from suing the homeowner for any losses on a home after foreclosure provided certain criteria are met. Generally, a homeowner may not be sued by his or her lender if the property in question is located on 2.5 acres or less and is a single family residence or duplex.  However, this statute only applies if the decrease in value is not due to the homeowner’s neglect. (Source: Title 33, Chapter 6.1)

Does my property qualify for the anti-deficiency statute?

1. Is your home located on 2.5 acres of land or less?
2. Is your home fully built and is a dwelling for one or two families?
3. If your home occupied (at least occasionally) by you or a tenant?
4. Was the decrease to the value of your property the fault of the market (as opposed to neglect on your behalf)?
5. Was the mortgage(s) used for the original purchase of the home, or at the very least, for improvements made to the property?

If you answered yes to all of the above questions, it is likely that your property IS protected by Arizona’s anti-deficiency statute – and your lender may be prevented from pursuing you for its losses from the foreclosure . However, this may not be the case in all situations even if you meet the above criteria. Your individual factors may affect the outcome and qualification under Arizona’s anti-deficiency statute.

If you are in the foreclosure process or soon will be, you should seek the advice of an attorney in order to make sure your foreclosure does not leave you responsible for a mortgage deficiency. Contact Pak & Moring to look into all of your legal options and discuss your pending or possible foreclosure.