Mortgage Information

Matthew Foley

Matthew Foley

Esq. & MBA

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Arizona’s Anti-Deficiency Laws

Arizona’s anti-deficiency laws are complicated, ambiguous, and there is limited case law available to add clarity.  The general rule is that Arizona allows lenders to sue homeowners for deficiencies on non-purchase money loans.  What does this mean?  If the loan was used to purchase the home, a lender cannot sue a homeowner for any deficiency amount after foreclosing (See A.R.S. §§ 33-729(A) & 33-814(G)).  This rule applies to primary residents and investment homes alike.

Loan documents contain both a deed of trust and promissory note, which provide two avenues for a lender to sue homeowners.  A.R.S. § 33-814(g) provides that a lender cannot file a deficiency action on a deed of trust, if the property is 2½ acres or less, and utilized as a one or two family dwelling.  However, A.R.S. § 33-729, provided that a lender cannot sue on the promissory note if the same conditions are met and if the loan was to purchase the home.  By default, lenders can sue for deficiency actions against the promissory note if it was not purchase money.

Case law in Arizona further extends the definition of purchase money to include “rate & term” refinance loans.  This leaves homeowners vulnerable only to “cashout” refinances, including non-purchase money equity lines.

Finally, some loan documents have “non-recourse” clauses that limit a lenders ability to sue.  Also, the anti-deficiency laws do not protect construction loans, where the loan defaulted prior to any certificate of occupancy being issued, and anti-deficiency laws do not apply to VA loans or HOA.

I’ve noticed that particular lenders are starting to sue on deficiency actions.  Lenders have a 6 year window to sue on promissory notes, and others lenders will eventually start to sue. Homeowners must:

1) understand the deficiency laws,

2) use this information when deciding how to settle a mortgage during a short sale,

3) be proactive if they know they can be sued for a deficiency action, and always speak to an attorney with specific deficiency questions.