Foreclosure of Residential Mortgages/Arizona Anti-Deficiency Laws
Before losing a home to foreclosure, it is critical to understand when a lender’s rights are limited to selling the home at foreclosure, and when a lender is entitled to a deficiency judgment. In addition to damaging one’s credit, a foreclosure may also result in a deficiency judgment if the foreclosure price doesn’t pay the lender in full. However, in specific instances in Arizona, a deficiency judgment is not permitted. The following terms and rules provide a summary of when a borrower may be subject to a deficiency judgment following a foreclosure.
1. A real property loan is typically secured by a Mortgage or Deed of Trust. A Mortgage is foreclosed judicially by filing a court action per A.R.S. § 33-721 et. seq. A Deed of Trust is foreclosed non-judicially via a trustee’s sale per A.R.S. § 33-801 et. seq. However, a Deed of Trust may also be foreclosed judicially as a Mortgage.
2. In judicial foreclosures and trustee’s sales, the type of property is key, not the type of borrower. Anti-deficiency rules apply only if the property foreclosed is 2½ acres or less and used for a single 1-family or single 2-family dwelling. Commercial properties don’t qualify nor do loans secured by residential homes being developed for sale but never used as dwellings.
3. If the property passes the test in #2, next determine if the loan is a purchase money (”PM”) or non-purchase money (”NPM“) loan. A PM loan is (a) any carry-back loan given upon buying a property, or (b) any loan used for all or part of the purchase price of a home. A home equity line of credit may be a PM loan if given to pay the price of the home. A PM loan doesn’t lose its PM nature when it is refinanced.
4. In a judicial foreclosure, only a PM lender on qualifying property is prevented from seeking a deficiency; NPM lenders are not — they can obtain a deficiency.
5. In a trustee’s sale, both PM and NPM lenders on qualifying property are prevented from seeking a deficiency. The borrower will not be subject to further liability for the loan.
6. If a 1st position PM lender forecloses via trustee’s sale, a 2nd position NPM lender does not lose its right to sue a borrower on the loan. Unless the 2nd position NPM lender is paid or settles the debt, a bankruptcy filing would be required to discharge the 2nd position NPM lender’s loan.
If you need to speak to an Arizona attorney, contact the attorneys at McCain & Bursh, PLC. www.mccain-bursh.com.
I’m confused about the distinction between PM and NPM. If I had a principal mortgage at purchase, then used an HELOC for equity withdrawal, is that still considered PM? Both loans are deeds of trust, so it sounds like PM vs. NPM doesn’t apply?
Items 5 and 6 appear to contradict one another. Can you please explain?
Thank you.