Arizona is a non-recourse mortgage state. Borrowers are not held personally liable for more than the value of the home when a loan is not repaid. The lender may recoup some of its loss through foreclosure. However, the lender may not sue the borrower for additional funds if the foreclosure sale does not satisfy the loan. The lender must accept the loss. The anti-deficiency statutes provide that the property securing the debt must be two and one-half acres or less and must be limited to and utilized as either a single one-family dwelling or single two-family dwelling. I highly recommend that you consult the Deficiency Flow Chart of one Arizona attorney.
In Bank One, Arizona, N.A. v. Beauvais, the Court of Appeals held that the anti-deficiency statutes protect a homeowner who has renewed, extended, or refinanced the original purchase money loan.
Non-recourse laws apply only to “purchase money” loans (original home loans that are used to purchase property). Almost all HELOC’s and home equity loans are considered recourse loans. Lenders for these loans may sue borrowers to recoup loss.
Two factors to consider when facing foreclosure:
- First, Home Equity Loans are subordinate to primary home loans. This means that the HELOC lender has claim to any money generated by a foreclosure, only after the primary mortgage lender recoups their full loss. The primary mortgage lender will incur cost to sell the home. The HELOC lender, in many cases, will not see any money.
- Second, almost all HELOCs are considered “recourse loans.” The borrower is personally responsible for paying recourse loans in full. If the lender does not recoup the full cost of the loan during foreclosure, they can sue the borrower for the remaining money owed.
If a HELOC lender forgives a recourse loan, the borrower is generally required to include the forgiven amount in his taxable income. Consult a CPA prior to paying tax on this forgiven debt, because you may not be liable for it.
Many homeowners may qualify for a short sale when facing hardship. Foreclosure should be avoided if at all possible. However, keep in mind that the anti-deficiency statues do not apply to short sales. You should have an attorney review your “short sale approval” letter to ensure that you are protected from your lender seeking the deficiency from you later.
{ 1 comment }
Great site. A lot of useful information here. I’m sending it to some friends!