Arizona Anti-Deficiency Protection For Construction Loans

In a previous blog titled “New Case Clarifies Lender Rights Under Arizona Anti-Deficiency Statutes” we discussed the implications of a recent appellate decision in regards to tracing taking cash out of a refinance to use for any number of purposes, but which were not used to purchase the home securing the loan.

However, Pasquan v. Helvetica also clarified another outstanding issue: Are construction loans taken out to pay for construction of a residence covered by the anti-deficiency provisions of A.R.S. 33-729(A)?

In Helvetica, the owners originally purchased a 4000 square foot home, and then refinanced the original purchase money loan. Later, they took out a construction loan to demolish the 4000 square foot home in favor of a new 11,500 square foot home. The proceeds from the last loan were used to pay off the prior existing refinanced purchase money loan, financed the construction of the new home, and then provided funds to the owner at closing which were used for things other than refinancing or construction of the home.

The court concluded that a construction loan does qualify as a purchase money obligation entitled to anti-deficiency protection if two conditions are met. First the deed of trust securing the loan must cover both the land and the dwelling being constructed thereon.


Second, the loan proceeds must have, in fact, been used to construct a residence that meets the size and use requirements detailed in A.R.S.33-729(A). The size and use requirements mandate that the home must be a one or two family dwelling, and on less than 2 ½ acres. A two-family
dwelling is most typically a duplex which provides two separate residences within the same building.

Under these limited conditions, the Court found that anti-deficiency protection furthered a number of different legislative policies. Included among these legislative polices are a broad and liberal application of the anti-deficiency statutes favoring homeowners, allocation of the risk of inadequate security for loans to the lenders in order to discourage overvaluation of the collateral, to reduce the impact from a general decline in property values during periods of economic distress, and avoiding exacerbating a general economic downturn by saddling homeowners who
have lost their homes with large, additional personal liability.

After rendering its conclusions, the appellate court sent the case back to the lower court to make some additional factual findings and render a ruling in accordance with the standards established by the appellate court. It is unknown from the appellate case whether or not the collateral sat on less than the 2 ½ acres permitted by the anti-deficiency statute. Assuming it was, the lower court will absolve the former homeowners for that portion of the loan proceeds which paid off the prior purchase money loans and for the portion the former homeowners can document were utilized in
constructing the new house.

The anti-deficiency statutes afford a great deal of protection, but application of these statutes can often by tricky, not to mention that the case law on these statutes continues to evolve. Consult a
reputable, experienced real estate attorney
to assist you if you are facing foreclosure.