Do You Get Money From a Foreclosure?
Uncover if and how property owners can receive funds from a foreclosure sale, explaining the process of sale proceeds and surplus claims.
A foreclosure is a legal process initiated by a lender to recover the balance of a loan when a borrower fails to make mortgage payments as agreed. This process typically involves the lender repossessing and selling the property that secured the loan.
How Foreclosure Sales Work
Properties undergoing foreclosure are commonly sold at a public auction, which can be conducted by various parties such as a trustee, sheriff, or court official. The highest bidder at the auction secures the property, and the sale generates proceeds intended to satisfy outstanding debts.
During the auction, the foreclosing lender often submits an initial “credit bid,” which represents the amount owed on the loan rather than cash. If no other bidder offers a higher amount, the property typically reverts to the lender, becoming what is known as “real estate owned” (REO). If a third party is the highest bidder, they acquire the property, usually in “as-is” condition, meaning without warranties regarding its state.
Distribution of Sale Proceeds
The funds generated from a foreclosure sale are distributed according to a legally defined hierarchy. First, the costs associated with the foreclosure process itself are paid. These expenses can include attorney fees, trustee fees, court costs, property inspection fees, and advertising costs for the sale.
Next, the proceeds are used to satisfy the debt owed to the foreclosing lender, covering the principal balance, accrued interest, and any late charges. If any funds remain after the foreclosing lender’s debt is fully paid, they are then allocated to other valid liens on the property. The priority of these additional liens, such as junior mortgages, home equity lines of credit (HELOCs), property tax liens, or homeowner association (HOA) liens, generally depends on their recording date.
Only after all foreclosure costs and all valid liens have been fully satisfied, any remaining money, known as “surplus funds” or “excess proceeds,” is due to the former homeowner. Receiving these surplus funds is not a common occurrence, especially if the property’s value has significantly declined or if multiple liens exist against it.
Steps to Claim Surplus Funds
If a homeowner believes surplus funds might exist after a foreclosure sale, they should promptly investigate the matter. The first step involves checking with the trustee, sheriff’s office, or court clerk who managed the sale, as they often hold records indicating the final sale price and initial distribution. A formal claim typically needs to be filed to request these funds.
This claim process often requires specific forms and documentation, such as proof of ownership and personal identification. Strict deadlines apply for claiming surplus funds, which can vary but often require action within a few weeks or months after the sale; for example, some jurisdictions allow 30 days for interested parties to assert a claim after notification. Failure to meet these deadlines can result in the forfeiture of rights to the funds.
It is possible for other unpaid lienholders to also file claims against the surplus, which might necessitate a court hearing to determine the rightful recipients. The funds may be held by a county treasury, court registry, or the trustee responsible for the sale. Consulting with legal counsel is advisable to navigate the procedural requirements and ensure a proper claim is made.