February 9th, 2011

The Arizona Anti-Deficiency Statute: Can a mortgage lender sue you for a deficiency amount after a foreclosure?

A common question from potential clients is whether a mortgage lender can sue for any deficiency amount owing after a foreclosure.  It is imperative for a person facing any foreclosure to consult with a competent Arizona real estate lawyerArizona foreclosure lawyer or Arizona bankruptcy lawyer to determine the correct analysis to this scenario.

Arizona Anti-Deficiency Statute

Under Arizona law, if you took out a mortgage for property consisting of two and one-half acres or less utilized as a residence (either by yourself or another person, such as a renter) and a trustee sale occurs (which is the primary method lenders use to foreclose on property in Arizona) by that mortgage lender, the lender generally cannot sue you for any deficiency amount.  For example, if you took out a $100,000 first mortgage and the house is only worth $70,000 at the time this lender forecloses, the lender cannot sue you for the $30,000 deficiency balance.

Furthermore, a borrower will not be liable for any deficiency amount in connection with any loan where the loan proceeds were used to purchase property of two and one-half acres or less utilized as a residence, even if that lender was in second position and did not initiate the trustee sale.  For example, if you have a first mortgage for $100,000 and a second HELOC mortgage for $50,000 that you used to make home improvements, and the house is worth $70,000 when the first lender forecloses via a trustee sale, the first lender received the entire $70,000 because it was in first position.  That first lender cannot sue you for the $30,000 deficiency you owe because the Arizona anti-deficiency applies to any trustee sale of a residence on two and one-half acres or less (regardless as to whether the loan was used to purchase the house).  However, the second lender, which received none of the $70,000 because it was in second position, can sue you for the entire $50,000 because that lender did not conduct the trustee sale, and the $50,000 was not used to purchase the house.

Remember that the anti-deficiency statute only applies with residential mortgages involving property of two and one-half acres or less.  If you took out a loan for $500,000 to purchase commercial property or vacant land and your property was worth $400,000 when the foreclosure occurred, the lender can sue you for the $100,000 deficiency because the Arizona anti-deficiency statute does not apply to non-residential loans.  In addition, the anti-deficiency statute does not apply to a mortgage loan by the Veterans Administration, even if such loan was used to purchase the residence.

As a side note, there will mostly likely not be any adverse tax consequences with respect to the deficiency balance not being collectible pursuant to the Arizona anti-deficiency statute.

Other Types of Loans

What if you took out a mortgage for $100,000 at 10% to purchase your home but later refinanced it with a different lender for the same amount at 5% interest? Do you still have protection under the anti-deficiency statute?  It depends.  What if you took out a $100,000 loan, but later refinanced it for $150,000, tapping into some of your home’s equity?  Does the anti-deficiency statute apply?  Again, it depends.  Recent Arizona Court of Appeals cases have provided some insight to those questions.

Also, be careful with short sales.  The Arizona anti-deficiency statute may not apply to a deficiency balance after a short sale because a short sale is not a foreclosure.


If you talk to a competent Arizona bankruptcy lawyer, there still may be defenses against debt liability that is not barred under the Arizona Anti-Deficiency Statute.  For example, you may be able to assert a “statute of limitations” defense in lieu of filing bankruptcy.  Generally speaking, a mortgage lender that forecloses on your property has 90 days after the foreclosure to sue you for any deficiency amount (assuming the anti-deficiency statute does not apply).  However, a lender in second position (i.e., a HELOC lender) does not have to comply with such 90 day period if that lender was not the lender that initiated the foreclosure.  That lender can sue you, usually within 6 years after you defaulted on that loan.

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44 Responses to “The Arizona Anti-Deficiency Statute: Can a mortgage lender sue you for a deficiency amount after a foreclosure?”

  1. Loni says:

    Hello there. Perfect blog page. It is so easy to understand! I have bookmarked it!

  2. Curtis says:

    I have asked at least 2 attorneys about this issue before and left confused when I heard their answers and analysis. Your article about this was clear and concise and covered the exact factual scenario that I am dealing with. Thank you for taking the time to publish this.

  3. Laura says:

    I had a home forclosed on. I have a first and second mortgage not a home equity loan but a second mortgage can the second still come after us and if so how much time do they have to do so.

  4. Mark says:

    I had a home forclosed on in Dec 2010 . I had a $45,000 second. The note holder of the second wants to settle with me for $5000 . If I settle can they still sue me later?

  5. Brian says:

    The lender foreclosed with a trustee sale on my original purchase money mortgage over a year ago. The same lender is now (over a year later) pursuing payment on a HELOC taken out with the same lender. The HELOC was taken out after the original purchase of the residence. Am I covered with the anti-defiency law on the HELOC because it was the same lender who forclosed with a trustee sale?

    • Scott Hyder shyder says:

      No. It has nothing to do with who the lender is or whether the lender on the HELOC was the same as the lender on your first mortgage. The HELOC was not used to purchase the house. Hence, the anti-deficiency statute does not apply, and you can be sued for the difference.

  6. Tamara says:

    I need advice. My husband and I bought are home 4 years ago at 224,000 and now the home is approx $100,000 less in value. Also are mortgage payments are way to high for us now since I am not working due to just having a baby. We don’t know if we should try to short sale, deed in lieu of foreclosure or bankruptcy. We are current right now but we want to try to stay in the home basically free for as long as we can so we can save money for future rent. What would you suggest we do? We are so very stressed especially with a newborn baby but just can’t afford the mortgage.

    • Scott Hyder shyder says:

      If the loan for $224,000 was a purchase money loan (i.e., a loan used to purchase your house), and your residence is on 2.5 acres or less, then if a foreclosure occurs, the only thing that will happen is that you will lose the home. The lender will not be able to sue you for any deficiency amount because the anti-deficiency statute applies. If you do a short sale or a deed of lieu, that IS NOT a foreclosure, and hence the anti-deficiency statute does not automatically apply. Therefore, if you proceed with a short sale or a deed in lieu, make sure the lender agrees IN WRITING to waive you from any deficiency amount. If the lender does not do this, you are better off just letting the home go into foreclosure.

      As far as how long you can stay in the house “rent free” after you stop making payments, it depends on how aggressive the lender is. The lender is not allowed to foreclose on your home until 90 days after the lender files a “Trustee Sale Notice”. Remember, the 90 day period starts from the time the lender files the Trustee Sale Notice. So, if you stop making payments now, and it takes the lender 3 months to file the Trustee Sale Notice, and then the lender has to wait another 90 days from that point, you may be able to stay in the home for 6 months after you stopped making payments. It just depends on how aggressive the lender is in filing that Trustee Sale Notice after you stop making payments.

      • Scott says:

        I have a little twist -I purchased a condo – not a single family dwelling. The condo complex has 300 units. Does my condo qualify under the AZ anti-deficiency statue? I purchased it 5 years ago for $210k. The value is $50k. I took out a $150 loan. The loan is due to adjust. While the unit has been rented for most of this time I have been in the negative and that deficit grows each year. We are now having troubles renting it. I am looking at the possibility of letting it go in to foreclosure. Can the lender come after me for the $100k deficiency? Thanks.

        • Scott Hyder shyder says:

          Actually, it really isn’t a twist. The anti-deficiency statute applies to most condos. You may want to speak to an experienced Arizona real estate lawyer so he or she can give you a full analysis. For example, if you short sell the property, that may end up hurting you because the anti-deficiency statute may not apply.

  7. Tim says:

    Our primary residence foreclosure was in Aug of 2010. The HELOC lender was BofA. We are now getting calls from collection agencies wanting to settle. We no longer hear from BofA but this is the second collection agency that has contacted us. We do not have money to pay them with my wife losing her job. Do we need to negotiate with these agencies or just wait to see if we get sued within the 6 year statute period? Also can the agencies themselves sue us for the HELOC balance?

    • Scott Hyder shyder says:

      Yes, you can be sued by a collection agency. No, you should not just wait until the 6 year statute of limitation expires. You need to talk to me or another experienced Arizona real estate lawyer and bankruptcy lawyer to figure out your best options to minimize the harm to your pocketbook. Depending on the size of the debt, it may be prudent to negotiate now or possibly file a bankruptcy (depending on what other debt you may have).

  8. Joe says:

    In your blog, you indicate that the Court of Appeals is addressing the issue of refinancing and the applicability of the Anti-deficiency statute. I refinanced and the difference between my original mortgage and what I owe now is approximately $29,000. Do you know if the Appellate Court has addressed this issue yet? I am scared to simply let the house go at this point.

    • Scott Hyder shyder says:

      There is no clear rule on the issue right now. However, based on some research, if the majority of the refinanced loan was used to pay off a previous loan that was used to purchase the house, then you are probably fine. However, you absolutely have to come in to see me or another experienced Arizona real estate lawyer to make sure. There are many options that will relieve you of liability. One incorrect move can make the difference between being sued and not being sued for any possible deficiency amount.

  9. JDL says:

    I had a 2nd mortgage on a property that I refinanced in 2007 that foreclosed 2 years ago via a Trustee Sale. Equity was taken out of the home in the form of a second mortgage and not by a HELOC by definition. My question is whether or not they are considered one in the same? I have spoken to 2 Attorneys in Arizona and they seem to advise that I am covered by the Anti Defiency Statute. However, internet research seems to show that I could be sued, but nothing on any Case Law shows a lender who has prevailed in such a case. What is the truth?

    • Scott Hyder shyder says:

      When I refer to HELOC, that also includes any home equity loan that WAS NOT taken out to purchase the home. As such, the lender can sue you, but there may be some defenses to that. You will need to speak to me or another experienced Arizona real estate lawyer to see what is the best way to mitigate your liability.

  10. Ken says:

    I am currently in Foreclosure and the auction date is set for the 13th Sep. 2011; what do I need to do post auction? Can I drop my insurance on the home post auction?

  11. Lis says:

    Your article states they can sue you for the “HELOC” but what about a “Home Equity Loan” they are 2 different loans. Just want to be clear.

    And we had to move and set the property up for a rental but made absolutely no profit on the rental just all out of pocket expense on our part and now have to foreclose, is there a way out of paying any fees on the home equity we took out if the lender decides to sue for it?

    • Scott Hyder shyder says:

      A HELOC is a “Home Equity Line of Credit”. A lender for a home equity loan usually can sue after the foreclosure for the deficiency amount, but there are some exceptions. Feel free to call me to discuss in more detail.

  12. Lis says:

    Can you please tell me if the Anti-Deficiency Statute applies to a Home Equity Loan, We never had a Home Equity Line Of Credit. We have a rental property that is losing money left and right for the past 5 yrs and we can not afford to keep iy, it is going into foreclosure. Will we get penalized for the Home Equity Loan?

    • Scott Hyder shyder says:

      Yes, but you should probably come and see me or another real estate lawyer because it sometimes is not as cut and dry as that. Plus, there are some possible ways to mitigate any liability you have. Feel free to give me a call.

  13. Curtis says:

    I have the same similar issue as this previous question

  14. Lee says:

    We have a manufactured home on 2 acres we have been renting for the last year, with a 1st mortgage of 65,000 and a HELOC of 38,000. Our renters are leaving soon and we don’t have the funds to fix the damage to the home to re-rent it, besides, the rent we received was hardly enough to make all payments. What are our options? We also have cc debt of $30k. If we file bankruptcy are we fully protected from being sued or owing those debts? Is it like debt forgivness?

    • Scott Hyder shyder says:

      You will definitely have liability once the foreclosure occurs. Bankruptcy is the correct option for your circumstances, particularly with $30,000 in credit card debt and a $38,000 HELOC. All of those debts will be discharged, and the “debt forgiveness” in bankruptcy is not taxable income. Feel free to call me if you would like some one-on-one advice.

  15. Fran says:

    Our foreclosure date is 2/7/12
    We have a 1st of $202K and a Heloc of $16K
    We currently have an offer on our Short Sale for $91K which has stalled the foreclosure.
    My question is if the 1st Lender offers the 2nd lender a token amount and we do not sign a promisory note to repay doesn’t that settle the debt? Also how can you transfer clear title with a Heloc that is unpaid? Isn’t that a lien on the property?

    • Scott Hyder shyder says:

      Your liability is seriously at risk here, and you want to make sure that proper language in the short sale documents are used. I would strongly advise you consult with me or another attorney for about an hour to get an overview of the ramifications of this short sale deal, what needs to occur, and what kind of language needs to be in the short sale documents to protect yourself from future lawsuits.

  16. Stu says:

    Mr. Hyder, many thanks for taking the time to help so many folks out. My situation seems somewhat diverse. The value of my home has dropped over 110K (purchased at $228,000). Technically, I can afford the payment, however the more I consider it, the more it appears that allowing forclosure may be a logical financial decision for me. Frankly, I do not like or want the house. I understand my credit will be seriously effected, but my wife was never on the loan. On many occasions throughout the above Q&A, you write about the HELOC, mentioning ‘if it was not used in the initial purchase of the home’. Part of my closing was a $50,000 HELOC which was used as the down payment for purchase of the house. In that case, would I be protected by the Anti-Deficiency statute on both loans (same lender, and I do meet the ADS requirements)? Thank you again.

    • Scott Hyder shyder says:

      You will need to look at the settlement statement to make sure it was earmarked as purchase money. I would have to look at your loan documents to make sure. However, the second lender may try to collect anyway because most HELOC lenders don’t realize that the it was an 80-20 loan. It has become a real problem. There are a few things you can do about it to be proactive and cover your bases. Give me a call to discuss.

  17. Jill says:

    Our situation is very similar to the previous blog. When my husband purchased his home back in 2007 through Countrywide, they talked him into a 100% loan, with interest only…yikes! We were not married at the time, so the home loan is only in his name. The main loan was for aprox. $150,000 and $35,000 second to make up the 100% as the home had a purchase price of $185,000. The home is now worth about $70,000 and he wants to walk. What should we look at on his loan documents to see if he is protected/or maybe it “us” now that we are married from a deficiancy. Should we see that it was marked in any particular way? Any advise as to what we should look for? We are ready to walk away from this home but want to be cautious before doing this.

    • Scott Hyder shyder says:

      You have some serious issues here. I need to look at your loan documents and ask you a bunch of questions to let you know what your options are. You may be able to walk away from this without facing liability, but you will need to be smart about it. Feel free to call me.

  18. Ty says:

    Hello!! I guess my situation is similar to others. I have a 205000 loan for my home that is 100% financed only one lender and it is an interest only loan. I am behind two months thus far. From what I have read I think I am covered under the anti law. I didnt take out any extra money and I have had the loan since 2007. Since having a baby I am no longer working but my husband is not on the loan, I purcahsed the home while I was single. Will I be covered?

  19. Ryan says:

    Hello. How does the anti-deficiency law apply to a VA loan used to purchase a home in AZ? It took approximately 18 months for the lender to foreclose on my home and a trustees sale on the home took place at the end of December 2011. The home was a primary residence, less than 2.5 acres, and no second mortgages…just the VA loan. Thanks.

    • Scott Hyder shyder says:

      This is a really good question. The anti-deficiency statute may not apply to VA loans, depending on a few circumstances. It is the one thing that many Arizona real estate and foreclosure attorneys forget about. It is an extremely complicated analysis. However, there are some things you can do to help prevent the liability as long as you do them before too much time passes before the foreclosure.

  20. Emy says:

    We bought a house in 2005 for $200K in Tucson. Now it is worth $70K. The neighborhood is not safe anymore. We had gunshots in our walls and have a sex offender living across the street. A few moth ago, we bought a new house in a nice area and rented the old house for less than what we have to pay for our monthly mortgage payment. We can no longer make the monthly payment, but we still collect the rent. The bank has not filed a Trustee Sale Notice yet. However, we hope the forcloure prosses ends soon.

    If we leave Arizona after the foreclosure of the old house and we want to rent the new house (the new house has equity) can the lender sue us or take the new house?

    • Scott Hyder shyder says:

      You absolutely have liability, and your new home could be subject to being foreclosed on if a judgment is recorded. However, there are a few things that you can do to help minimize this risk. You absolutely need to talk to a real estate lawyer before making any further decisions.

  21. Frank says:

    Situation is this. 2002 bought house for 195,000. In 2005 refinanced with HELOC of 63,000. I did work to house and used personally, paying off auto/motorcycle loans and acquiring furniture. In 2007, refinanced again, combining all loans into one single (e-loan bought off by major bank), where again they also paid off a few loans I had (credit card and auto). In 2009 I was divorced, both names on all loans. I have been renting since the divorce, but I can not make anymore payments due to a tenant that flooded the house, and insurance not covering it (paid out of pocket, his rent to fix). Tenant now out and I am 4 months past, and received acceleration latter. I have talked to attorney (twice…once from overseas where I live) who said I have nothing worry about as the bank signed all your loans into one, and thus myself (and ex wife) not having any equity loans anymore, and they took that responsibility . My CPA also said the same, that as long as the equity was satisfied in 2007 by your new mortgage, they have all been paid, and all that you have to worry about aside from the main one mortgage and a foreclosure hopefully happening before 2013 are some tax issues (which could be big). Any thoughts on this Scott?

    • Scott Hyder shyder says:

      Yes, I have many thoughts. I disagree with the advice you previously received. The tax issues are a whole different story. I have so many questions that I would have to ask you to give you a full opinion.

  22. Jenny says:

    Hello –
    About 3 years ago our home was foreclosed on – we purchased it with a 100% 80/20 loan – the first loan was foreclosed on and they never foreclosed on the 2nd loan until just last year I believe….if I am reading everything correctly – they most likey cannot come after us as the 2nd loan was used to purchase the home?

  23. Brad says:

    We were foreclosed on by a second mortgage. Now the first mortgagee is threatening to sue on the note instead of foreclosing because they have now merged with the mortgagee who already foreclosed? Can they do that or must they foreclose on their first position mortgage before suing in a seperate suit?

  24. Stacee says:

    Hello. We are underwater in our home and are tempted to refinance with the new HARP 2.0 program that lets you refinance no matter how under water your house is. Question is, if we refinance with this program with another bank would we still potentially be covered by the anti-deficiency statute if we ended up needing to foreclose one day? We have one mortgage, no second, and the loan is currently with B of A.

  25. Chris says:

    I am thinking of walking away from my Mesa AZ home but want to know if I was to stop payments now, will the foreclosure be complete by the end of the year. I am very concerned about the mortgage company dragging their feet until the anti deficiency statute is expired. What are the laws about any grandfathering that might take place when the statute expires?

  26. chris says:

    Hello, about four years ago I purchased a manufactured home on four acres. About a year ago I bought another home and now rent out the manufactured home. The renters are going to be moving out, and I don’t think it makes sense to keep paying on a house that has dropped in value about 80,000 dollars. If I stop making payments do I have any liability? There is no 2nd mortgage, and the first mortgage was an fha loan.

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