Facing foreclosure is tough. Many homeowners wonder what happens to the money they put into their house or if they get any money back at all. Knowing what happens to your home equity in a foreclosure can guide smarter choices if you’re ever at risk of losing your property.
Understanding Home Equity and Foreclosure
Home equity represents the portion of your home’s value that you truly own after subtracting your remaining mortgage balance. If you bought a house for $300,000 with a $60,000 down payment, you started with that amount in equity. If your home’s value rises to $350,000 and your mortgage balance is $200,000, your equity increases to $150,000.
So, what happens to home equity in foreclosure? Do you get some money back? The answer depends on what happens at the foreclosure sale.
What Happens at a Foreclosure Sale?
Once a homeowner falls behind on multiple mortgage payments, the lender eventually schedules a foreclosure auction to recover the debt. The sale is public, and both the lender and outside buyers can bid. The lender usually makes the first bid, known as a credit bid, which covers what’s owed.
If a third party bids higher, they win the property. The home might sell for more or less than what’s owed. Any amount above the mortgage becomes what’s known as surplus funds. If it’s below, there’s a deficiency, meaning the borrower still owes money after the sale.
Do You Get Money Back from Foreclosure?
Yes, in the form of surplus funds. If the home sells for more than the mortgage balance plus foreclosure costs, the leftover money belongs to the former homeowner. These funds represent the equity you built in the house, minus any fees or liens.
For example, if your home sells for $450,000 but you owe $425,000, you might get $25,000 in surplus funds. However, lenders first use the sale money to pay late fees, unpaid mortgage payments, and foreclosure costs. Only what remains after these expenses goes back to you.
Claiming Surplus Funds After Foreclosure
If your foreclosure sale produces surplus funds, you must claim them. The lender or foreclosure trustee won’t send this money automatically. You have to follow state-specific procedures, often involving filing a claim with the court or trustee.
It’s important to keep your forwarding address updated. Many homeowners lose the chance to claim surplus funds because they move without notifying the trustee or fail to respond to notices.
How Much Time Do You Have to Claim Surplus Funds?
The time to claim surplus funds varies by state but is often limited to months or a few years. Missing this window means you might lose your right to the money, which may then go to the state.
What About Other Liens on Your Home?
Sometimes, your home has other debts attached, such as a second mortgage, home equity line of credit, or judgment liens from creditors. When surplus funds exist, these junior lienholders get paid first. Only if money remains after these liens does it go to the former homeowner.
Imagine your home sells for $550,000, and you owe $525,000 on the primary mortgage. If a second mortgage of $15,000 and a $5,000 judgment lien exist, these must be paid before you receive anything. In this case, you would only get the remaining $5,000.
How Foreclosure Costs Can Reduce Your Equity
Foreclosure is expensive. The lender charges fees for attorneys, trustees, sheriff’s services, and paperwork. They might also buy insurance if your policy lapses during foreclosure. All these costs come out of the sale proceeds, reducing the money left for you.
Homes sold in foreclosure often fetch less than their market value. Buyers avoid foreclosed homes because they cannot inspect them before bidding. This lowers the sale price and often leaves little or no equity for the homeowner.
Turning a Setback Into a Strategic Move
Foreclosure often feels like hitting rock bottom. But if handled the right way, it can become a stepping stone instead of a dead end. Knowing what happens to home equity in foreclosure gives you power, not just to understand your situation, but to act wisely in it.
If you’re able to sell before the foreclosure is final, you might still recover some value. If your lender sells the home for more than what you owe, you might still walk away with money, but only if you claim it properly. Use this moment to reassess your financial goals. Get support, create a recovery plan, and remember: foreclosure may take your house, but it doesn’t have to take your future.