Question: I have a home in Arizona [anti-deficiency state] that was purchased with an 80/20 loan. I have never refinanced the loans. We were in the process of negotiating a short sale, got approval from the first [with Country Wide] and they agreed to pay the 2nd [Citi] $3k, when we went back to Citi to get final approval we discovered that they charged off the 2nd and sold the loan to a subsidiary which has now turned it over to an attorney that claims they are going to file a deficiency judgement against me and collect the debt. They claim that since it was a second mortgage and it was charged off that they can do this. It was a second but it was a “purchase money” loan. Can they come after me for the deficiency?
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Answer: – Even though Arizona is a “anti-deficiency” state, you have to meet certain requirements in order for the lender to NOT sue or file a deficiency judgment. As with all states, those that have a trust deed as their main security instrument, it is very uncommon for the lender to file a judgment against the homeowner. Since Arizona’s main security instrument is a “Trust Deed” then automatically deficiency judgments are very unlikely.
Now here is what the law states in Arizona…As outlined in Arizona Revised Statutes, Title 33, Chapter 6.1, a person may not be sued by his or her lender if the property is located on 2.5 acres or less and is a single family residence or duplex. This only applies if the decrease in value is not due to the home owner’s neglect and is not a VA loan. VA is allowed to file a deficiency judgment against the homeowner, if it’s a VA loan.
Although Arizona’s “anti-deficiency” statutes prevent a lender from suing a person for any losses on a home after foreclosure, it also only applies to “purchase money” mortgages which basically means the money was used to purchase the property and not to pay off other debts. So if you take out a 2nd mortgage or more commonly a home equity line of credit (HELOC), which is used to pay off debts, or buy personal items, then the lender may file a deficiency judgment or sue a person for any losses on a home after foreclosure. But like I said before, since Arizona is a “Trust Deed” state it is very unlikely this will happen. And if by chance it does, many people will file bankruptcy to eliminate the judgment once and for all. It’s more common that the lender will simply 1099 the homeowner for the difference, however if you qualify, you can have your accountant counter the 1099 and not have to pay anything.