Arizona Short Sale Law: Purchase money mortgages explained

Arizona Short Sale law can be confusing when it comes to topics like construction loans, investment property and how & when purchase money applies.
This article was published as: “Short Sales & Arizona Anti Deficiency Law” September, 2012 issue of Arizona Journal of Real Estate & Business, by Daniel Kloberdanz. Any and all copyright is retained by the original author/publication.
Any notes added by us will include a “-” sign before them.
1. Types of Short Sale Agreements
Generally we are seeing three types of documents for short sales in todays market. 1) the lender agrees to release its lien to allow the short sale and the lender expressly agrees to release the borrower from any further liability on the loan; 2) the lender agrees to release its lien to allow the short sale and the borrower signs documentation agreeing that a portion of the debt is still owed after the short sale (sometimes with the borrower agreeing to execute a new promissory note for the unpaid difference); and 3)the lender agrees to release its lien to allow the short sale but the documents do not address whether or not the borrower remains liable for the remainder of the debt which is unpaid as a result of such short sale. In some instances, the short sale documents will state the lender reserves it’s right to a deficiency if any exists, the effect of which is essentially the same as the documents being silent on the matter.
– Related video: Example of Arizona Short Sale Law:Approval Letter containing Lenders waiving right to pursue a deficiency. Watch the video to see the language your approval letter should contain.
Too often we see a borrower agree to sell their home with a short sale and agree to be liable for the remainder of the debt, even though the lender had no legal right to sue the borrower in the first place (in the case of a purchase money loan on a residence, as explained below). We also see situations where the borrower would not have otherwise been liable on the debt and the lender completed a trustees sale on the home, but the borrower may have inadvertently preserved his or her liability on the loan by doing a short sale. – see above link to video.
In either case, the real estate agent representing the borrower (ie the short sale seller) may have serious liability if he or she failes to advise his or her client that the client should have either 1) refused to do the short sale and allow the lender to foreclosure, if that was a possibility, or 2) should have agreed to complete the short sale only on the condition the lender expressly agree to release the borrower from any further liability on the loan, again, if that was a possibility.

arizona short sale law

Your Approval Letter must contain deficiency waiver language

2.) Arizona Short Sale Law: Arizonas anti deficiency statutes
If the proceeds of a foreclosure are less than the loan balance, the lender is generally entitled to pursue a personal judgement against the borrower, known as a “deficiency”. A deficiency is equal to the amount of the debt minus the greater of the either 1) the prevailing bid at the foreclosure sale 2) the fair market value at the time of the foreclosure sale.
Since 1971, Arizona had had in effect two “anti deficiency” statues which prohibit lenders from seeking deficiency judgements under certain types of residential loans. ARS 33-729(A) (purchase money mortgages) and ARS 33-814(G)(deeds of trust). These anti-deficiency statues apply only where the secured real property does not exceed two and a half acres, and the secured property is “utilized as” and “limited to” either a single one-family or single two-family dwelling(and therefore the statues do NOT protect borrowers of commercial properties, raw land, and residential property with more than two units.)
Contrary to popular belief, our courts have held the anti deficiency statues DO protect investors to the same extent as persons who use the home as their primary residence. Therefore, there is no requirement the borrower actually live in the home in order for the anti deficiency protections to apply.
3.) The “Purchase Money” Requirement under the Statues and Baker vs. Gardner
For whatever reason, when the Arizona legislature passed the anti-deficiency laws in 1971, it limited the anti deficiency protections to “purchase money” mortgages but did not place the same purchase money limitations on loans secured by a deed of trust. A purchase money mortgage is a loan used to pay all or part of the purchase price of the property.
Over twenty years ago, the Arizona Supreme Court made an important ruling in Baker v Gardner, 160 Ariz. 98, 770 P.2d 766 (1989), and held the anti deficiency statues prohibit a secured lender from suing a homeowner on the promissory note if the loan was used to purchase the home. The court held the lenders only recourse against the defaulting borrower is to foreclosure on the property (either judicially or by trustee’s sale).
The most important part of the Baker decision is contained in the courts supplemental opinion which held the prohibition against suing on the promissory note applies only to “purchase money” lenders. Therefore, lenders for home equity loans and lines of credit CAN sue directly on the note, even if the loan is secured by a mortgage or deed of trust against a single family residence. The BAKER supplemental opinion affects only the lenders ability to sue directly on the note, and does not change the law that any deed trust lender (both purchase money and non-purchase money) who actually completes a trustee’s sale on a home is then prohibited from seeking a deficiency judgement.
4.) Refinanced Purchase Money Loans and Construction loans
In the recent decision by the Arizona Court of Appeals entitled Helvetica v. Pasquan 1 CA-CV 10-0804 (Court of Appeals, March 20th, 2012), the court held that a refinance of a purchase money loan retains its characteristics as a purchase money loan, and is therefore protected by the anti deficiency laws the same as an original purchase money loan. The Court also held that loan proceeds used to construct a qualifying residence also will be given anti deficiency protection, however, any sums disbursed in a loan transaction for non-purchase money purposes may be traced and segregated, and recovered by the lender in a deficiency action the same as a non purchase-money loan.

Get Free Email Updates!

Join thousands of other visitors now for a monthly newsletter with new content, real estate updates & insider news only available to subscribers

I will never give away, trade or sell your email address. You can unsubscribe at any time.

  • Yes! I Want to Know My Options

  • -
  • Should be Empty:

Compassion & Clarity from your Team

“Hi Tracy...Thank you for keeping in touch and keeping us advised as steps progressed. .Reg and I are soooo very thankful for you and the Team’s handling of all the sheets and letters we received from our mortgage company. We are sorry we lost our beautiful home, but glad it was handled the next best way (for our credit) and that someone else now desires it..."...

selling your home FREE REPORT
10 Secrets to Selling Your
Home the Pros Don't Want You To Know!