Question: Recently in a column you stated that, after a mortgage lender forecloses on a home built on 2 ½ acres or less, under Arizona Real Estate law the mortgage lender is generally prohibited from suing the homeowner for any money lost by the mortgage lender on the loan. Is this protection limited to a homeowner’s principal residence, or does this protection also apply to investors who own homes? Does this protection apply to foreclosure of second mortgages like a home-equity line of credit? Does this protection apply to a vacant lot upon which a home will ultimately be built?
Answer: Your questions could be the basis for an all-day seminar on foreclosure law. The following are brief answers.
The anti-deficiency protection after foreclosure is not limited to a homeowner’s principal residence. Investors who own homes in Arizona also have anti-deficiency protection after foreclosure.
Protection from personal liability for homeowners is limited to mortgage loans used to purchase the home. In other words, a purchase money mortgage lender cannot sue for a deficiency after foreclosure, nor file a collection lawsuit for the amount of the loan.
If a second mortgage loan such as a HELOC was not used to purchase the home, the second mortgage lender is not required to foreclose but can file a collection lawsuit for the amount of the second mortgage loan.
There can never be a deficiency after a foreclosure of a home. In the rare circumstance when a second mortgage lender forecloses on the home, the anti-deficiency protection applies and the second mortgage lender cannot sue for a deficiency.
Finally, a loan used to purchase a vacant lot and construct a home does not have the protection of the anti-deficiency statutes until the home is actually built and occupied — that is, “utilized as a dwelling.”