Facing Foreclosure In Arizona? Know The Anti-Deficiency Laws

Arizona is one of the states with anti-deficiency laws. What is an anti-deficiency law? This law protects borrowers from their lenders suing them for the amount of money the lender does not recover during a foreclosure.

When a mortgage company obtains a house through foreclosure, it will then try to sell the house to recover any money the previous owner owed, including mortgage, late payments, attorney’s fees and other costs. Because in today’s deflated market, the lender may only be able to recover a fraction of the amount owed, the lender loses money on a foreclosure.

In some states, the lender may be able to receive a deficiency judgment in court and sue the former home owner for the balance of money owed on the house. In Arizona, however, there is a fairly broad anti-deficiency law.

What are Arizona’s anti-deficiency laws?

The laws are outlined in Arizona Revised Statutes, Title 33, Chapter 6.1. A lender may not sue for losses on a home if the following conditions apply on a home secured with a deed of trust and is sold at a trustee’s sale:

  • The property is 2.5 acres or less.
  • The home is a single family residence or duplex.
  • The home is sold pursuant to the Trustee’s power of sale.

If the home is secured by a mortgage used to pay all or part of the purchase price of the home, the lender may not pursue recovery if:

  • The property is 2.5 acres or less.
  • The home is a single family dwelling or duplex.
  • The home owner did not reduce the value of the home by neglect.

The anti-deficiency laws also cover a second home that meets the above criteria, or if the property has a second Deed of Trust or mortgage.

If the lender does seek a deficiency judgement, it has 90 days after the sale of the property to begin proceedings.

If a home owner does not fall under these guidelines, the property may be deeded back to the lender prior to foreclosure. This is known as Deed-In-Lieu of Foreclosure. In this deed, the lender agrees to accept the property for the amount the home owner owes. It is important to realize, though, that the former home owner may be taxed on the amount that was forgiven by the lender.

The one exception to Arizona’s anti-deficiency laws are VA loans. The VA lender is allowed to obtain a deficiency judgment despite the current state laws.