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Chris Pendleton


Shannan Marty

Associate Broker - Realtor®, ABR®,CDPE, CSP, CNE, CSSN, SFR, a-REO, PSC


Many Arizona homeowners are facing the possibility of foreclosure in this tough economy. With home values declining and mortgage payments rising, it has been tough for many homeowners to make their monthly payments.  An even tougher fact is that these homeowners could be liable for the difference of the foreclosure sale and the balance owed on the mortgage. This is called a deficiency.

Great news for those Arizona homeowners is that Arizona has anti-deficiency laws (A.R.S. 33-729 and 33-814G).  These laws prohibit lenders from collecting on a deficiency. Not all mortgages apply to this statue such as second mortgages, lines of credit and not all refinanced loans.

Most mortgages in Arizona on residential properties are called deeds of trust. Foreclosure actions in Arizona are termed trustee sales.  This is the correct terminology for the state of Arizona.

When a homeowner falls behind in payments, the lender then calls in the trustee to foreclose on the deed of trust.  The county recorder then places a notice of trustee sale with a date, time and location of the sale of the property. 

If payments are not up to date, the trustee then holds an auction where the first bidder is the lender. After the bidding, the lender holds the property by deed.

In a declining market, the property’s value may be less than the value of the loan.  The difference of this number when sold is the deficiency.  Lenders cannot take legal action against the homeowners to recover the deficiency.

Mortgages used to finance homes are called purchase money security interest.  This is uncollectible after foreclosure.  The only time a second mortgage qualifies for this title is when used for the initial purchase of a residence.  An 80/20 loan is an example of a purchase money second loan.

Mortgages for home improvements and home equity loans are called non-purchase money security interest.  After foreclosure, this balance is hard to distinguish and the only option for a lender is a lawsuit.

Refinanced loans that include a variety of borrowing and payoffs are also subject to the anti-deficiency laws although opinions differ greatly on this matter.

Click HERE to view an article on the Anti-deficiency statute and refinanced loans.

The IRS had another hurdle to foreclosures.  Did you know that cancelled debt can be considered income? That’s right.  If a debt is cancelled, the borrower will receive a cancellation of debt form and this amount is taxable as income. Since the IRS and the Mortgage Forgiveness Debt Relief of 2007, there are options to those homeowners who have received a debt forgiveness form.

The Mortgage Forgiveness Act of 2007 helps those borrowers whose property:

  • Was their primary residence for two of the past five years
  • The property was the principal residence of the homeowner
  • If the debt was for the purchase, construction, or improvement of the property.

Remember Arizona anti-deficiency statues and real estate law can be complicated.  It is always best to consult a real estate attorney to have him or her determine if your situation is covered under the statute or not..