Short Sale FAQ’s

There are two methods a lender may use to foreclose on a property in Arizona.  The borrower’s rights and protections under the Arizona Anti-Deficiency Law will depend on which method the lender, in the lender’s sole discretion, chooses to use for the foreclosure.  Please note that the anti-deficiency law only applies if a trustee sale or judicial foreclosure actually occurs.  The law does not apply to a short sale or a deed in lieu of foreclosure transaction. 

TRUSTEE SALE PROCESS JUDICIAL FORECLOSURE PROCESS
AN ACTUAL LAWSUIT
1.  Deed of Trust only 1.  Any encumbrance on real property, including a Deed of Trust.
1.   Does the mortgage or deed of trust secure property that is located on two and one-half acres or less?2.  Is the property a single one-family or a single two-family dwelling actually used as a residence by someone (including rental property)? 1.   Does the mortgage or deed of trust secure property that is located on two and one-half acres or less?2.  Is the property a single one-family or a single two-family dwelling actually used as a residence by someone (including rental property)? 3.  Is the loan secured by the mortgageor deed of trust a “purchase money” loan?
If the answer to each the above is yes, then the lender can not sue the borrower for any additional funds. If the answer to each the above is yes, then the lender can not sue the borrower for any additional funds.

 

Typically in Arizona we see the majority of foreclosures as a Trustee’s Sale. 

Once I stop making my payments, how long will the foreclosure process take?

Typically after 3 months of nonpayment, the lender has the right to file a notice of foreclosure sale.  The foreclosure sale date is usually set for 3 months from this notice.  This is a six month window, but many times it takes longer. 

I only have one loan on my home; it is the original loan I received when I purchased the home. If I foreclose will I have to pay off the remaining balance?

Regardless of how the lender pursues a foreclosure, the lender cannot come after the borrower for any unpaid balance on the loan.    

I am facing foreclosure on my investment property. The loan is my original loan, would I owe the unpaid balance since it is an investment property?

 NO. The lender cannot come after the borrower for any unpaid balance on the loan.  The anti-deficiency law applies to all properties that meet the physical requirements.  There is no requirement that the property be owner occupied. 

I have two loans on my home; one for 80% of the original sales price and one for 20% of the sales price – how does this play out? 

The lender on the first loan (80%) cannot come after the borrower for a deficiency. The second loan (20%) is wiped out by the foreclosure of the first position lender (the 80% loan).  But because the second position lender (20% loan) was “purchase money”, then just like the first, it cannot require you, the borrower, to pay any of that loan back.   

I refinanced my original purchase loan but did not receive any cash with the refinancing process; does this change my loan to something I would have to pay the remaining loan balance on after foreclosure?

The lender probably cannot come after the borrower for a deficiency (balanced owed)  but there is some minor risk in this situation.  If the lender forecloses with a trustee’s sale, then the lender cannot come after the borrower for a deficiency.  The only risk exists if the lender pursues a judicial foreclosure as the refinance may not be considered a “purchase money mortgage.” 

I did a “cash-out refi” and when I refinanced my home I received money and I used that money to invest in other properties.  Will I have to pay back anything on the loan through the foreclosure?

The loan has probably lost its protected status as a “purchase money mortgage” but, if the lender forecloses with a trustee’s sale, then the lender cannot come after the borrower for a deficiency.  The only risk of a deficiency judgment exists if the lender pursues a judicial foreclosure, in which case the lender can get a deficiency judgment against the borrower. 

I took out a home equity line of credit (HELOC). How does that work with my original mortgage loan if I am in foreclosure?

HELOC money is not considered “purchase money” and therefore is not covered under any anti-deficiency laws.  If the first position lender forecloses on the home, the lender that gave you the HELOC gets nothing.  They can sue you or place a judgment or lien against you for the balance of your HELOC.  If you stop paying only the HELOC, but continue making payments to your first position lender, the HELOC cannot foreclosure on your property, but they still have the option to sue or place a judgment/lien against you.

Tax Considerations:

 

Federal law generally requires that any debt that is forgiven or cancelled by a lender must be included as income on the borrower’s tax return. The amount of the forgiven debt is identified on a IRS form called a “1099” (ten ninety-nine).  Federal law requires that a 1099 must be issued by a lender anytime there is debt that is forgiven.  Whether this income is taxable to you can only be determined by an accountant, CPA or tax attorney.  Here are a few guidelines on what may or may not be taxable, but you MUST discuss your specific situation with an accountant or CPA for a final, correct determination.

Do I have taxable income if: 

If I have lived in the house 2 of the last 5 years do I qualify for the debt relief act? 

Yes, assuming you satisfy the other requirements.  The debt relief act applies to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes may be excluded as income.  The two year time period is part of the test for a primary residence. 

DO I get a deficiency if: 

Primary residence with a 1st & 2nd the 1st forecloses the property is sold at auction.

Investment property with 1st & 2nd the 1st forecloses the property is sold at auction. 

The issue of primary residence vs. investment property is not relevant to the deficiency issue, but is relevant to the taxation issue. 

And property that satisfies the anti-deficiency law will result in a lender being unable to pursue a deficiency.  This is true regardless of whether the property is a primary residence or an investment property.  Thus, an investor could own multiple properties, all of which are in foreclosure, and have the protections of the anti-deficiency law on each property. 

However, the distinction between a primary residence vs. an investment property is relevant to the taxation issue.  Only forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes, may be excluded as income.   

Primary residence with a 1st & 2nd   the 2nd forecloses the property is sold at auction.

Investment property with 1st & 2nd the 2nd forecloses the property is sold at auction. 

The loan has probably lost its protected status as a “purchase money mortgage”.  However, if the lender forecloses with a trustee’s sale, then the lender cannot come after the borrower for a deficiency.  The only risk of a deficiency judgment exists if the lender pursues a judicial foreclosure, in which case the lender can get a deficiency judgment against the borrower. 

Primary residence with a 1st & 2nd   the 1st forecloses the property is sold through a short sale

Investment property with 1st & 2nd the 1st forecloses the property is sold through a short sale 

The anti-deficiency law does not apply in a short sale transaction or a deed in lieu transaction.  Accordingly, unless the short sale or deed in lieu documentation provides that the debt is forgiven, then the lender may sue the borrower for the balance. 

Income derived from forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes, may be excluded as income, will not be taxable as income.  Accordingly, a short sale on a primary residence will protect the borrower from the tax liability. 

Primary residence with a 1st & 2nd   the 2nd forecloses the property is sold through a short sale

Investment property with 1st & 2nd the 2nd forecloses the property is sold through a short sale 

The anti-deficiency law does not apply in a short sale transaction or a deed in lieu transaction.  Accordingly, unless the short sale or deed in lieu documentation provides that the debt is forgiven, then the lender may sue the borrower for the balance. 

Income derived from forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes, may be excluded as income, will not be taxable as income.  Accordingly, a short sale on a primary residence will protect the borrower from the tax liability. 

Does the deficiency depend on if the loan was used for purchase/improvements vs. cash out?

The anti-deficiency law has very specific conditions for when it applies.  Those conditions differ based upon the method of execution pursued by the lender.  If the lender forecloses with a trustee’s sale, then the lender cannot come after the borrower for a deficiency for the specific conditions are satisfied.  However, those conditions do not make a distinction between owner occupied, home improvements or cash out.  The only risk of a deficiency judgment exists if the lender pursues a judicial foreclosure, in which case the lender can get a deficiency judgment against the borrower if the debt is not purchase money.  Home improvements and cash out are not protected.