If you, an Arizona homeowner, go through a foreclosure and the price paid at the foreclosure sale is not enough to cover the amount you owe the bank on your mortgage loan, the bank might be able to come after you for the "deficiency." Fortunately, in many cases, Arizona law prohibits the bank from getting a deficiency judgment.
Arizona Foreclosures: Overview
An Arizona foreclosure can be judicial or nonjudicial. In a judicial foreclosure, a bank goes to court to foreclose. In a nonjudicial foreclosure, a bank finishes specific out-of-court steps that the state statutes lay out. In Arizona, most foreclosures are nonjudicial, so that process is briefly described here:
To start an Arizona nonjudicial foreclosure, a foreclosure trustee (the party that handles nonjudicial foreclosures in Arizona) records a notice of sale in the county land records. The notice provides information about the sale—which must be at least 91 days after the notice is recorded—including the date, time, and site of the sale. After recording the notice, the trustee:
- sends a copy to borrower in the mail
- posts the notice on the property and at a court building at least 20 days before the sale, and
- publishes the notice in the newspaper once a week for four successive weeks.
Deficiency Judgments Explained
In an Arizona home loan transaction, a bank normally requires a borrower to sign a deed of trust. A deed of trust is a document that gives the bank the ability to sell the home through at a foreclosure sale if the borrower falls behind on the loan payments and fails to get current. At the foreclosure sale, the bank will bid on the property using what’s called a “credit bid,” which means the bank bids the amount the borrower owes on the debt—or sometimes less. If the bank (or a third-party) buys the home at the foreclosure sale for less than the borrower owes on the loan, the difference between the sale price and the debt is the deficiency.
For example, suppose Louie takes out a loan to buy a home in Arizona. He borrows $200,000, but falls behind in payments after losing his job. The bank forecloses and Louie’s home sells at the foreclosure sale to a new owner for $175,000. The deficiency is $25,000.
Some states let a bank get a personal judgment—a deficiency judgment—against a borrower for the deficiency balance. The bank may then use standard collection methods, like wage garnishment or a bank account levy, to collect the outstanding deficiency amount.
When a Bank Can Get a Deficiency Judgment in Arizona
In Arizona, a bank can generally get a deficiency judgment by filing a separate lawsuit within 90 days following a nonjudicial foreclosure sale or in a judicial foreclosure. But the bank can't get a deficiency judgment under certain circumstances.
When deficiency judgments aren't allowed. Arizona has an anti-deficiency law that states a bank cannot get a deficiency judgment after a nonjudicial foreclosure if the property is:
- 2.5 acres or less, and
- a single one-family or a single two-family dwelling. (For a judicial foreclosure, there is an additional requirement in order to avoid a deficiency judgment: the mortgage or deed of trust being foreclosed must have been a purchase-money loan, which means the borrower must have used the loan money to buy the property.)
Example. Say you took out a loan to buy a single-family home on a quiet street in Peoria. 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, your bank can’t file a suit after the foreclosure to get a deficiency judgment against you.
Limitation on deficiency judgments. Under Arizona law, deficiency judgments—if available—are generally limited to the lesser of:
- the total mortgage debt minus the fair market value of the home on the sale date, or
- the total mortgage debt minus the foreclosure sale price.
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, like a modification, forbearance agreement, or repayment plan. If you can’t afford to hire a lawyer, talk to a HUD-approved housing counselor.