Do You Have to Pay Back a HELOC on a Foreclosure in Arizona?
Arizona residents may take out a home equity line of credit to withdraw money from the equity of their primary homes or investment properties. A deficiency balance occurs when either a primary mortgage lender or the HELOC lender forecloses upon a property. An Arizona resident may have to pay back the difference between the sale price of his property and the remaining HELOC balance under certain circumstances.
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Warning
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Although the state of Arizona sets generous rules to protect residents from owing deficiency balances to lenders, many of these protections only apply to loans used to buy a primary residence. HELOC borrowers receive few protections from creditors, who may collect a deficiency balance by garnishing their paychecks and bank accounts. Creditors can also collect interest on owed balances and report negative information about borrowers to the major credit bureaus.
Types
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In Arizona, lenders can foreclose on properties through either nonjudicial or judicial processes. A nonjudicial HELOC agreement contains a power of sale clause that allows the lender to foreclose on a property without a judicial order. A third-party trustee will hold mortgaged property in trust until the borrower defaults on a mortgage or pays off the loan and gains full title to the property. If the borrower defaults, the trustee will auction the property. The trustee will compensate the primary mortgage lender first and then the HELOC lender from the proceeds. With a judicial foreclosure, the lender places an encumbrance on a property and will have to pursue foreclosure in state court. An Arizona judge can then authorize a sale of the property at a county auction, from which the HELOC lender will recover some of his funds.
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Circumstances
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A lender can't pursue a HELOC deficiency balance if he initiates a nonjudicial foreclosure, because the resident doesn't hold legal title to the property. If a lender purses a judicial foreclosure, he can receive a judgment for a HELOC deficiency. This is because the resident has legal title to the property and doesn't receive protection under Arizona nonresource laws.
Strategy
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As a nonrecourse state, Arizona prohibits a lender from both foreclosing on a property and seeking a deficiency balance on a mortgage used to buy property, according to Section 33-722 of the Arizona Code. If a resident is in a desperate financial situation and can't afford both his HELOC and primary mortgage payments, he should always make his HELOC payments.
Benefits
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If the HELOC lender forecloses first, the primary lender can take action to collect a deficiency balance. An Arizona resident should always ensure that his primary lender forecloses upon his property. This allows him to pay down his HELOC deficiency balance and prevents him from owing a large deficiency balance to his primary lender.
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