Short Sale “Promissory Notes” and Foreclosure “Deficiency Judgments”: How Much Will YOU Owe YOUR BANK After a SHORT SALE VS FORECLOSURE?
Every homeowner looking at the short sale option to avoid foreclosure should be asking the following question: “When doing a short sale, will I have to pay the bank back the difference between what the home sold for and what I owe?” The answer is both yes and no, depending on the situation. I’ll try to make this as simple as possible.
(DISCLAIMER: I am not a licensed attorney or CPA. Please consult an attorney or CPA in the event of facing foreclosure or short sale decisions. If you need an attorney, and cannot afford one at $350 an hour, click here.)
What is a “Deficiency Judgment?”
A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure or short sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. The availability of a deficiency judgment depends on whether the lender has a recourse or non-recourse loan, which is largely a matter of state law.
When does a “Deficiency Judgment” apply to me?
Well, fortunately, 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 homeowner’s neglect.
However, if you have a tri-plex (3 units) or more, or a parcel larger than 2.5 acres, the bank can come after you for the deficiency. The caveat is they have 90 days after the trustee sale date (foreclosure date) to file a claim, and that claim can only be for the difference between the balance owed and fair market value of the property.
So, in the final analysis, duplex (2 units) or less and less than 2.5 acre parcel, you’re good. No deficiency judgment possible by Arizona state law whether you do a short sale or, by bad fortune, a foreclosure happens. (Make sure to get the deficiency waived in writing if doing a short sale! Your negotiator on your short sale should make this a priority!!)
But what if I own 3 units or more? Or my house is on a 3 acre parcel?
If you are in this particular situation, and have hit a financial hardship thus unable to make your payments, you must be informed of your options, because chances are, upon foreclosure, the bank will sell your debt to a collection agency, and these guys will hound and maybe sue you for the deficiency.
In a couple of days, I’ll have a follow up post on what you can do to best avoid “Deficiency Judgment” if you are not protected by Arizona statues. Stay tuned!
