How Are Co-Signers Affected on an Arizona Home Foreclosure?

Co-signers don't lose property in foreclosure, but they still suffer adverse affects.

A co-signer is legally responsible for repaying a mortgage loan to the same extent as the principal borrower under the same loan. The key difference with a co-signer is that the co-signer generally does not own the property subject to the mortgage loan. So, while the co-signer does not risk losing her property, the co-signer will still be affected by a home foreclosure in Arizona.

Foreclosure

Foreclosure is the legal process a mortgage lender takes to enforce a defaulted mortgage loan against the collateral property referenced in the mortgage documents. Typically, the collateral is the home of the principal borrower under the mortgage loan. Foreclosure laws in Arizona allow lenders to sell the collateral in order to raise money to pay off the balance due on the delinquent mortgage loan.

Types

Arizona law generally allows mortgage lenders to foreclose either judicially or nonjudicially. The procedure chosen by the lender can have a significant difference for co-signers. In judicial foreclosure, the lender files a lawsuit and obtains a written order from an Arizona state court judge allowing the lender to hold a sheriff's sale on the property. In a nonjudicial foreclosure, the lender hires a trustee, which is a private party like an attorney or title company, to hold a publicly noticed trustee foreclosure sale of the property.

Deficiency Judgment

A deficiency results when the collateral property does not sell for enough money in the foreclosure sale to fully pay off the balance due on the mortgage. The unpaid balance on the mortgage is the deficiency amount. In a judicial foreclosure action, the mortgage lender has a right to collect the deficiency from the principal borrower or from any co-signer on the mortgage. The lender can sue any co-signer for the full amount of the deficiency. In a nonjudicial foreclosure, however, the lender has no right to sue for a deficiency amount, so a co-signer has no risk of liability for the deficiency.

Credit Impact

Regardless of whether a lender has the right to pursue a deficiency against a co-signer, a co-signer will still suffer adverse affects from the foreclosure. A foreclosure has a significant negative impact on the credit rating of the principal borrower and any co-signer on the mortgage loan. While Arizona law may protect the co-signer from any liability for the deficiency, Arizona law does not protect the co-signer from negative credit reporting because of the defaulted mortgage.

References

• "Real Estate Finance Law"; Grant S. Nelson, et al.; 2008
• Nolo: The Foreclosure Surivival Guide