In Arizona, if you go through foreclosure and the sale price is not enough to cover the balance of your mortgage, your lender can come after you for the "deficiency." However, Arizona law places limits on the amount of the deficiency judgment. And in some circumstances Arizona law prohibits the lender from getting a deficiency judgment altogether.
Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Arizona, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Arizona.
(For more articles on foreclosure procedures in Arizona and assistance for struggling Arizona homeowners, visit our Arizona Foreclosure Law Center.)
What Is a Deficiency After Foreclosure?
When a lender forecloses on a mortgage, the total debt owed by the borrowers to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
Example. Say the total debt owed is $200,000, but the home only sells for $150,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount (in our example, $50,000) from the borrowers by doing such things as garnishing the borrowers’ wages or levying the borrowers’ bank account. (Learn about methods that creditors can use to collect judgments.)
(To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
Arizona Deficiency Judgments
Most foreclosures in Arizona are nonjudicial, which means the lender does not have to go through state court to get one so long as the deed of trust contains a power of sale clause. (Learn more about power of sale clauses.)
Some foreclosures in Arizona are judicial. In judicial states, the lender must foreclose through the state court system. To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?
(Learn more about Arizona Foreclosure Procedures.)
Deficiency judgments are generally allowed. In Arizona, the lender can obtain a deficiency judgment by filing a separate lawsuit within 90 days following a nonjudicial trustee’s sale or as part of a judicial foreclosure.
Some deficiency judgments are prohibited. However, no deficiency is allowed after a nonjudicial foreclosure if the property is:
- 2.5 acres or less, and
- a single one-family or a single two-family dwelling. (Ariz. Rev. Stat. § 33-814.)
Also, no deficiency is allowed in a judicial foreclosure if:
- the property is 2.5 acres or less
- the property is a single one-family or a single two-family dwelling, and
- the mortgage/deed of trust being foreclosed was a purchase-money loan (it was used to pay the purchase price of the property.) (Ariz. Rev. Stat. § 33-729.)
Limitation on deficiency judgments. Deficiency judgments, if available, are limited to the lesser of:
- the total amount owed to the lender as of the date of the sale minus the fair market value of the property on the date of the sale, or
- the total amount owed to the lender as of the date of the sale minus the foreclosure sale price.
Can Lenders of Second Mortgages, HELOCs, and Other Junior Liens Collect From You?
Generally, when a senior lienholder forecloses, any junior liens (these would include second mortgages and HELOCs, among others) are also foreclosed and those junior lienholders lose their security interest in the real estate. If a junior lienholder has been sold-out in this manner, that junior lienholder can sue you personally on the promissory note. This means that if the equity in your home doesn’t cover second and third mortgages, you may face lawsuits from those lenders to collect the balance of the loans.
Learn more in our article What Happens to Liens and Second Mortgages in Foreclosure?
Deficiency After a Short Sale in Arizona
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the proceeds of the sale pay off a portion of the mortgage balance. (Learn more about short sales to avoid foreclosure.)
There is no Arizona law that says a lender cannot get a deficiency judgment following a short sale. (A bill that would have barred lenders from seeking a deficiency against certain borrowers after a short sale, called House Bill 2584, was introduced in the Arizona House of Representatives in 2012, but it did not pass.)
To avoid a deficiency judgment, the short sale agreement must expressly state that the lender waives its right to the deficiency. If the short sale agreement does not contain this waiver, the lender may file a lawsuit to obtain a deficiency judgment.
Deficiency After a Deed in Lieu of Foreclosure in Arizona
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt. (Learn more about deeds in lieu of foreclosure.)
There is no Arizona law that says a lender cannot get a deficiency judgment following a deed in lieu of foreclosure. To avoid a deficiency judgment with a deed in lieu of foreclosure, the agreement must expressly state that the transaction is in full satisfaction of the debt. If the deed in lieu of foreclosure agreement does not contain this provision, the lender may file a lawsuit to obtain a deficiency judgment against you.
Arizona Foreclosure Law
To find the Arizona statutes that govern foreclosures, go to www.azleg.state.az.us and click on “Arizona Revised Statutes.” The relevant statutes are located in Title 33, Chapters 6 and 6.1 in §§ 33-741 through 33-749 and §§ 33-801 through 33-821.