If your Arizona home sells at a foreclosure sale for less than you owe on your mortgage loan, you might still be liable to pay money afterward. That's because, in some cases, under Arizona law, the foreclosing bank is able to get a deficiency judgment. Fortunately, in many instances, state law prohibits the bank from getting this kind of judgment. And, when available, Arizona law places some limits on the amount of the judgment. (To learn about what to do, and what not to do, in a foreclosure, see Foreclosure Do's and Don'ts.)
In this article, you’ll learn what a deficiency judgment is, under what circumstances the bank can get a deficiency judgment against you in Arizona, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
In a foreclosure, the total debt that the borrower owes sometimes exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a “deficiency.”
Example. Say the total amount you owe on your home loan—including outstanding principal, interest, fees, and costs—is $300,000. But your home sells for just $250,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the foreclosing bank can seek a personal judgment (called a “deficiency judgment”) against the debtor to recover the deficiency. Generally, once the bank gets a deficiency judgment against you, the bank may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your bank account. (Learn about different ways that creditors use to collect judgments.)
Most foreclosures in Arizona are nonjudicial, which means the bank does not have to go through state court. Judicial foreclosures are allowed too. In a judicial foreclosure, the bank forecloses through the state court system.
In Arizona, the bank can generally 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. (Ariz. Rev. Stat. § 33-814, § 33-729). But state law restricts or prohibits deficiency judgments under some circumstances.
Subject to some exceptions, like if the loan is relatively recent and the real property contains a dwelling that was never substantially completed or never used as a dwelling, a deficiency judgment isn’t allowed after a nonjudicial foreclosure if the property is:
Example. Say you took out a loan to buy a single-family home on a quiet street in Peoria and you move in. The lot is around 10,000 square feet. A few months ago you lost your job and fell behind in mortgage payments. The bank recently started a nonjudicial foreclosure. Because the property is smaller than 2.5 acres and is a residential single-family home that you live in, your bank can’t file a suit after the foreclosure to get a deficiency judgment against you.
A deficiency judgment, if available, is limited to the lesser of:
A deficiency judgment isn’t allowed in a judicial foreclosure—again, subject to some exceptions, like if the loan is relatively recent and when the real property contains a dwelling that was never substantially completed or never used as a dwelling—if:
A short sale is when you sell your home for less than the total debt you owe, and the proceeds of the sale pay off a portion of the balance. A deed in lieu of foreclosure (deed in lieu) is when a bank agrees to accept a deed to the property instead of foreclosing to get the property’s title. (With a deed in lieu, the deficiency amount is the difference between the total debt and the fair market value of the property.)
In Arizona, the bank may get a deficiency judgment after a short sale or deed in lieu. To avoid a deficiency judgment with either of these kinds of transactions, the agreement must expressly state that the bank waives its right to the deficiency. If the contract doesn’t contain this waiver, the bank may file a lawsuit to get a deficiency judgment. Though, if the bank forgives the deficiency, you might have tax consequences.
If you’re facing a foreclosure in Arizona, consider consulting with a foreclosure attorney to get information about whether you're likely to face a deficiency judgment in your circumstances. A foreclosure attorney can also explain various options that might be available to prevent a foreclosure. If you can’t afford to hire a lawyer, a HUD-approved housing counselor is a good source of information.