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What Are 'Anti-Deficiency' Laws?

Some states have anti-deficiency laws as a form of relief from some aspects of foreclosure. These state laws protect borrowers by stopping creditors from going after them. Mortgage debts with anti-deficiency protection include:

Anti-deficiency home loans prohibit lenders from suing their borrowers for the difference between the mortgage balance and foreclosure sale price.

The following is a general overview of how these laws work. See FindLaw's Foreclosure Process and State Foreclosure Laws sections for more information.

Example Anti-Deficiency Scenarios

California has anti-deficiency laws. Suppose a home in California gets sold through a trustee's sale in a non-judicial foreclosure. The original home price was $500,000, which was entirely borrowed. But the home only sells for $300,000 after the bank forecloses. A mortgage lender can't sue the homeowner for the $200,000 difference. This is true even though the property's fair market value was insufficient to pay off the total amount of the $500,000 mortgage.

Similarly, a primary home is secured by a deed of trust or purchase money loan. Arizona's anti-deficiency statute may protect it. Arizona's anti-deficiency law applies to homes on less than 2.5 acres of land. Arizona law also requires the house to be a single one-family or single two-family dwelling.

In general, anti-deficiency state laws only apply to a borrower's primary house, not second homes or vacation property. Anti-deficiency laws typically do not protect second mortgages or home equity lines of credit. Also, there is no protection when the property isn't used as the purchaser's primary residence.

How Anti-Deficiency Laws Work

In a typical foreclosure, if the purchaser fails to make the mortgage payment, then:

  • The property gets foreclosed and
  • The lender takes the title through a legal procedure

The property then gets sold to pay the mortgage. But a deficiency between the sale price and the outstanding balance of the mortgage may exist. Many states that allow deficiency lawsuits base the deficiency on the house's fair market value, not the selling price. Suppose a home sold for $300,000 at foreclosure but an appraiser valued it at $400,000. If a borrower still owes $500,000, they can only get sued for $100,000.

Under anti-deficiency laws, a lender can only recover the property and the proceeds of a later sale. In other words, the borrower does not pay any deficit between the sale proceeds and the outstanding loan balance. This allows the borrower to walk away from a property without owing a deficiency judgment.

A bankruptcy filing will typically wipe out such debts in states where deficiency claims are allowed. In such states, a borrower may also successfully defend against the claim if the lender fails to bid a fair market price at foreclosure.

Contact a Foreclosure Attorney

Keep in mind that every person's situation is different. Some borrowers may be listed as guarantors on promissory notes, incurring personal liability. Others might be exempt under nonrecourse laws. Understanding these distinctions can be confusing.

Speak with a real estate foreclosure attorney for information specific to your state. They can give you legal advice to help you take advantage of anti-deficiency laws. A lawyer can also help you explore other options to delay or prevent foreclosure.

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