In the state of Arizona, certain homeowners, if approved beforehand by their lender, may be able to undergo a voluntary conveyance of the deed to their home to their lender, in exchange for the lender releasing deed of trust obligations currently owed by a home loan borrower. In this exchange, the homeowner essentially gives back their property to the lender, who will forgive a pre-determined amount of debt obligation owed by the homeowner. Each state has specific foreclosure statutes concerning deed in lieu, as well as more importantly, the abilities of lenders to obtain deficiency judgments on deed in lieu agreements. Below are outlined the Arizona specific considerations relevant to deed in lieu of foreclosure in the state.
Initiating Deed in Lieu Process in Arizona
Deed in lieu must occur in a voluntary manner. In practice, this means homeowners must propose to their lender, in a formal hardship letter most likely, a workout involving deed in lieu of foreclosure. Typically, a homeowner will contact their lender and other advisory parties, such as an attorney, and contemplate potential workouts for an existing home facing foreclosure. If it appears that deed in lieu is a feasible option, the homeowner must request this action from their lender.
From the lender’s standpoint, deed in lieu of foreclosure is often the least beneficial foreclosure workout, aside from the rather expensive and prolonged foreclosure process itself. Especially in today’s saturated foreclosure market, lenders simply do not want more property they are tasked with selling, but instead, want cash from homeowners. Many deed in lieu agreements stem from a failure of homeowners and lenders to come to terms through other foreclosure prevention workouts, specifically short sales. In the case of lenders specifically in Arizona, a general guideline for most involves requiring prospective deed in lieu claimants having their homes on the market for at least three months.
Negotiating Deed in Lieu with Lenders in Arizona
In order to even obtain a deed in lieu agreement with your lender, a homeowner must convey their case strongly. The ability to obtain deed in lieu will depend on the fair market value of a home, the current amount of debt owed, and the prospective costs and losses a lender foresees during a foreclosure sale. In essence, if the numbers do not add up in the lender’s favor, they will not be willing to do a deed in lieu. One notable point about the overall debt owed on a given home; this figure only accounts for the debt obligation with a given lender, but in many cases, homeowners will have other junior loans secured by a given property, or other federal and state tax liens may present. In most cases, the existence of these additional debt obligations attached to a given property will dissuade a lender from agreeing to deed in lieu.
Deficiency Judgments and Tax Liability after Deed in Lieu in Arizona
In most deed in lieu agreements, a homeowner will include a provision stating no deficiency judgments will be pursued following the transaction. A deficient amount occurs when a lender agrees to accept a deed in lieu transaction, which involves accepting a home with a fair market value less than the total amount of debt outstanding secured by the property. In the state of Arizona, even without the provision preventing deficiency liens, primary residences are protected from deficiency actions if they are less than two and a half acres, per the Arizona Revised Statutes Title 33, Chapter 6.1. Income properties are not subject to Arizona anti-deficiency law protections.
Until the end of 2012, primary residence owners discharging mortgage debts through deed in lieu are afforded tax-exempt status on any amount of debt discharged or forgiven by lenders, up to $2 million annually, per the Mortgage Forgiveness Debt Relief Act of 2007 and extended by the Emergency Economic Stabilization Act of 2008.
Getting Legal Help
Obtaining lender approval for a deed in lieu agreement is an uphill battle for a homeowner, who will only benefit from the intervention of legal counsel in their foreclosure prevention case. In addition, the specific terms and provisions of each deed in lieu of foreclosure agreement require the overview of an attorney for most homeowners, to ensure no future debt obligations will arise.
