Is it better to try to do a short sale or just let my under-water house be foreclosed?

That depends on a few factors. In Arizona, homeowners are protected by two anti-deficiency statutes with respect to their homes, A.R.S. §§ 33-729(A) and 33-814(G). § 33-729(A) applies only to purchase money mortgages. Arizona courts have construed it to apply also to purchase money deeds of trust that are foreclosed judicially. A.R.S. § 33-814(G) applies to deeds of trust foreclosed by trustee’s sale, whether or not they are purchase money deeds of trust. The statutory scheme, however, does not provide for non-purchase money mortgages. In other words, second mortgages that were taken out after the purchase of the home are not going to be covered by the anti-deficiency statute. The house must also qualify by being on less than 2.5 acres and be a single family home. The law is unclear whether it applies only to foreclosure. There is no mention of whether it applies in a short sale situation.

To answer the question, it will depend on whether you have just a first mortgage or a first and a second mortgage. If you decide to short sell having both a first and a second there will have to be some negotiation with the second mortgage holder to agree to take much less than what is owed. Also, if you can’t get the second lien holder to give you a full release they will still be able to seek a deficiency from you after the closing. The same goes for the first mortgage holder if you do not get a full release from them at closing since the law is unclear as to whether the anti-deficiency statutes will apply to a short sale.

A foreclosure with just a first mortgage will allow the homeowner to be released from any deficiency as long as the house qualifies under the statute. If the homeowner has a second non- purchase money lien on the house, the bank can still seek a deficiency. In these types of situations, the only complete protection from deficiency would come from filing a bankruptcy.