When a house goes into foreclosure, the mortgage company will turn around and sell the home in hopes of recoverng any money owed to them by the home owner. This includes the previous mortgage amount, late payments, lawyers fees, and administrative costs incurred during the foreclosure process. Sometimes a lender can only sell the property at a fraction of the cost. In that case, the lender loses money on the transaction.
While in some states, the lender may be entitled to receive the deficiency judgment in court and come after the ex-home owner for the remaining balance owed (ie: the lender can sue the ex-home owner for the amount they lost on the transaction), in Arizona, however, there are limitations to a deficiency incurred during foreclosure.
Arizona's "anti-deficiency" statutes prevent a lender from suing a person for any losses on a home after foreclosure. 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.
If a lender seeks a deficiency judgment, they have 90 days after the sale of the property to begin judicial proceedings to recover any losses. Failure to do so may result in the lender's loss of its right to recover the deficiency.
However if a home owner fears that he or she does not qualify for this exception, a deficiency judgment may be avoided by deeding the property back to the lender prior to foreclosure. This is known as a deed-in-lieu of foreclosure. By accepting the deed, the lender is agreeing to accept the property for the amount that the person owes, thus eliminating any potential deficiency.
Still, Should a person deed the property back to the lender, he or she may be taxed on the amount of the deficiency that was forgiven by the lender. In other words, if the mortgage company lost 20,000 on a $100,000 home and deeds the home to the lender, the lender will forgive the $100,000 loan and accept the $80,000 as payment in full. However, the ex-home owner may now have to report the $20,000 as taxable income on his or her next tax return.
The only exception to Arizona's anti-deficiency statutes are VA loans. As decided by recent litigation, VA is allowed to obtain a deficiency judgment despite current state laws that prohibit such actions.
If a homeowner is involved in a mortgage or a deed trust and causes a reduction in the value of the property (damage done to the property or not taking care of it) they are usually protected by this law. However commercial properties and vacant land are not protected. VA and FHA also have special considerations due to federal law and may also not be covered.