Do You Get Any Money If Your House Is Foreclosed?

Foreclosure is a legal process where a mortgage lender takes possession of a home due to the homeowner’s failure to make mortgage payments. This action typically results in the sale of the property to recover the outstanding debt. For many homeowners facing this challenging situation, a significant question arises: Is it possible to receive any money from their home once it goes through foreclosure?

Understanding Your Home’s Equity

Home equity represents the portion of your home’s value that you genuinely own, free and clear of debt. It is calculated by subtracting the total outstanding mortgage balance and any other liens from the home’s current market value. For instance, if a home is valued at $300,000 and the total debt against it is $200,000, the homeowner possesses $100,000 in equity.

Equity can grow over time through principal payments on the mortgage and an increase in the property’s market value. Conversely, if property values decline or if additional liens are placed on the home, equity can decrease. Understanding your home’s equity influences the potential for receiving funds after a foreclosure. While equity remains the homeowner’s property even during foreclosure, the process itself can diminish its value.

How Foreclosure Sale Funds are Distributed

When a home is foreclosed, it is typically sold through an auction or a similar process to recover the debt owed to the lender. The proceeds generated from this sale are distributed according to a legal hierarchy. First, the costs directly associated with the foreclosure process are paid. These expenses can include attorney fees, auctioneer fees, court costs, property maintenance, and taxes.

After these initial costs are covered, the primary mortgage lender who initiated the foreclosure is paid the outstanding balance of their loan. If any funds remain, junior lienholders, such as those with second mortgages, home equity lines of credit, or unpaid tax liens, are then paid in their order of priority. Only after all debts and costs have been satisfied are any remaining funds, known as “surplus funds” or “excess proceeds,” allocated.

Claiming Any Surplus Funds

If a foreclosure sale generates surplus funds, the former homeowner may be entitled to claim them. Typically, the foreclosure trustee or the court overseeing the process will notify the former homeowner of the existence of surplus funds, often by mail to their last known address.

To claim these funds, the homeowner usually needs to file a formal claim or motion with the court or trustee. This process often requires submitting documentation to prove identity and ownership of the property. There can be competing claims from other parties, such as additional creditors, which may complicate the process. Homeowners should act promptly, as specific timeframes and state-specific procedures apply for claiming these funds.

When No Funds Remain

In many foreclosure scenarios, the sale of the property does not generate enough money to cover all outstanding debts and associated costs. This situation results in what is known as a “deficiency.” For example, if a homeowner owes $300,000 but the home sells for $250,000, a $50,000 deficiency exists.

In such cases, the lender may pursue a “deficiency judgment” against the former homeowner. This is a court order obligating the borrower to pay the remaining balance of the debt. Lenders might pursue these judgments to recover their losses, and if granted, they can utilize various collection methods, such as wage garnishment or bank account levies. However, some states have “anti-deficiency laws” that protect homeowners from these judgments, particularly for primary residences and certain types of loans. The applicability of these laws and the likelihood of a lender pursuing a deficiency judgment depend on state-specific regulations and the homeowner’s financial circumstances.