Do you get any of the equity back on a house that is in foreclosure?

Answer 1

When homeowners face foreclosure, the equity they thought they had in their house usually completely disappears by the end of the process. Especially if a house goes all the way through foreclosure and is sold at a public auction, there is more likely to be a deficiency than any profit from the sale. But even if the homeowners find a solution before that point, they can often find themselves quite dismayed at the evaporation of their home equity.

Equity in a home is destroyed during the foreclosure process by a series of circumstances. On the level of the individual house and mortgage, it can be erased by the bank's piling on of fees and charges, and by the desperation of homeowners to find a solution to the problem. On a larger social level, foreclosures in high numbers can lead to a general decline in property values in a real estate market.

When homeowners miss a mortgage payment, the bank will immediately begin charging as many extra fees as they can, many of which will accrue interest. All of these extra charges, if unpaid, will be counted against the homeowners' equity. Late fees, legal and court costs, and interest on unpaid balances can easily add more than $10,000 to the amount needed to pay off a loan, which has the effect of lowering the amount of equity people have in their homes.

Selling a house in foreclosure is also a difficult situation due to the lack of time homeowners may have to find a buyer and close the transaction. For this reason, they may be forced to give up much of their equity by lowering the asking price for the house to entice someone to purchase quickly. In the meantime, the bank will still be adding their own fees to the mortgage balance, which makes it even more difficult to get any profit from the sale.

The state of the housing market in the past year (as of this writing in May 2008) has deteriorated so that values are falling in general throughout the country due to higher than expected foreclosure rates and a lack of available credit. As property values fall, the equity in homes may completely disappear, with the homeowners going "underwater." This means that they have negative equity in their properties, owing more on the mortgage than the house is currently worth.

Thus, when foreclosure victims attempt to work out a solution and get ahold of their equity in a property, they may discover that much of it has disappeared. The longer it takes to resolve the foreclosure, the more charges the bank will add onto the balance, and the less time the owners will have to arrange a sale. As more homeowners face foreclosure throughout the country, property values will also fall further as more homes are placed on the market than can be purchased in a short period of time.

By the time a house goes to a public auction, it may be clear that the home is currently undesirable to most potential buyers. By this time the lender has added as many extra fees as it can, and the property will most likely be auctioned off for less than the total amount owed on the loan. This leads to the property selling for less than what is owed and the homeowners having a deficiency. Banks in some states can then try and sue the owners to get a judgment for this amount, although this is somewhat rare.

In the rare event that a house sells for more than what is owed on it, then the owners have a right to these profits. This is their return from the sale of the house, and they can claim it with their local county. They must do this with the county, though, because the local government will often not inform the owners that they are entitled to their profits from the sale of the property. The longer the homeowners do not claim this, the more likely it will simply be taken by the state as unclaimed property. It is always in the best interests of the owners to find out how much their property sold for at the sheriff sale.

The negative effects on a home's equity during the foreclosure process often destroys most of the equity that homeowners once believed they had. This is one reason why it is so important to try and work out a solution as quickly as possible, to avoid many of the extra charges the bank will add to the balance of the loan. But even if a method to stop foreclosure can be worked out quickly, the larger problem of generally declining property values can also have severely damaging consequences on homeowners' equity positions.

Answer 2

When a property is sold at foreclosure the proceeds of the sale are distributed according to the laws in the particular jurisdiction. Generally, the proceeds go first toward the balance of the foreclosed mortgage, all the costs associated with the foreclosure and all outstanding municipal fees and taxes. Next, any excess proceeds from the sale will be used pay off any junior liens. If there remains any excess after all sums due are paid that amount should be paid over to the former owner. You need to check your state laws to determine how they must be paid or claimed.