After the Foreclosure Sale: May the Lender Recover a Deficiency Judgment?

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The short answer is it depends. A deficiency judgment is created if, after the foreclosure sale, the sale proceeds are less than the indebtedness. Whether the lender can pursue the borrower for a deficiency judgment depends on the type of loan and security used i.e. a deed of trust or mortgage. Generally, if the real property is: 1) 2 ½ acres or less; 2) has a singly family or two family dwelling constructed on it and 3) is at least occupied occasionally by the owner or a third party, a lender will not be able to pursue a borrower for a deficiency judgment. If the real property does not fit the criteria, then the lender may pursue a deficiency judgment as allowed by law. While seemingly straightforward, given Arizona’s statutory framework and the variety of lending situations, it is not always the case. The following is intended to answer some frequent questions.

May a lender pursue a deficiency judgment after foreclosure on real property used as a rental or investment?

If the property meets the above criteria and the loan was used to purchase the home, the lender may not pursue a deficiency judgment. Further, if the loan was used to purchase the home, the lender may not waive its security in the home and sue the borrower on the loan or promissory note.

May a lender pursue a deficiency judgment after foreclosure on a home where the purchase money loan was refinanced?

Generally no, but it may depend on the use of the funds from the refinanced loan. “Purchase money loan” means that the loan was used to pay all or part of the purchase price and the loan was part of the same transaction to purchase the land. If the refinance loan proceeds are greater than the remaining balance of the original purchase price, a lender may be able to pursue the borrower for repayment of the unpaid portion of the loan not used for the purchase.

After foreclosure of the first lien deed of trust, may the lender pursue the borrower on a home equity loan secured by a second deed of trust?

If the second deed of trust or mortgage was used to purchase the property, then no. If the proceeds from the second loan were used for other purposes, then the lender may pursue the borrower for the unpaid balance on the note.

We recommend that you consult with an experienced real estate attorney to determine your rights as either a lender or borrower. Call me at (480) 833-1113 and I will be glad to discuss your personal forclosure situation.

Attorney Profile: Shane D. Buntrock, Foreclosure Attorney