In some states, your lender can sue you to collect a deficiency if your unpaid balance was more than the foreclosure sale price. But, if the unpaid balance is less than the foreclosure sale price, any surplus funds belong to you – not the lender.
Written by Chiara King.
Updated October 31, 2021
Foreclosure Surplus Funds: What They Are & How To Claim Them
Many homeowners use mortgage loans to purchase their homes. If borrowers can’t make their loan payments as promised, the mortgage holder has the right to foreclose on the property, repossess the home, and sell it. If the mortgage holder receives more money from the sale than what the borrower owed on the property, the former property owner is entitled to receive these surplus funds.
What Is a Foreclosure?
Foreclosure is a legal process that allows lenders to recover the money they loaned through a mortgage when a borrower doesn’t make their mortgage payments. The lender recovers the money by taking and selling the real estate, often at an auction. Lenders are allowed to do this because mortgages are secured loans, and the house is the collateral. The foreclosure process differs by state.
The Foreclosure Process Varies by State
Depending on the state, the foreclosure may be judicial, strict, or nonjudicial. In a judicial foreclosure, the mortgage holder files a lawsuit against the borrower and gets a court order called a judgment. The judgment allows them to sell the property. The mortgage holder files a lawsuit in a strict foreclosure as well, but in that case, the real property transfers immediately to the lender. In a nonjudicial foreclosure, the mortgage holder doesn’t have to file a lawsuit at all, but the lender must still provide notices and observe waiting periods that are required by state law and the mortgage loan documents.
Foreclosed properties are typically auctioned off at a sheriff’s sale. The lender may have a representative there who starts the bidding with a small bid of up to 30% of the property’s equity. This bid is called a credit bid because the mortgage holder doesn’t have to pay cash at the auction if its winning bid is less than the borrower’s loan balance. Credit bidding allows the mortgage holder to hold on to the property for a while longer if it’s in danger of being sold for too little due to a lack of bidders.
Depending on the state, a borrower may have a right of redemption for a limited time after the sale. To redeem a property after a foreclosure sale, you must pay the sales price, interest, and other costs to the winning bidder. State law will also determine how long the borrower can stay in the property before being formally evicted.
Foreclosure and Bankruptcy
Filing bankruptcy will stop the foreclosure process in its tracks, even if the property is scheduled for auction the very next day. This is the power of bankruptcy’s automatic stay, which stops all creditor collection activities as soon as you file your case. A Chapter 7 bankruptcy will only buy you a few weeks to either catch up on your payments or negotiate a mortgage modification. A Chapter 13 bankruptcy can be more helpful for a past-due mortgage by helping you catch up on your missed payments over a period of up to five years while you continue making regular mortgage payments.
If you are facing foreclosure and are unfamiliar with the process, you should seek professional advice.
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What Are Surplus Funds?
If your property is foreclosed and it sells for less than you owed on the mortgage, the unpaid portion of the loan is called a deficiency. In some states, lenders can sue you and get a deficiency judgment from a court. This judgment requires you to pay the deficiency to the lender. Depending on state law, if you don’t pay, the lender can garnish your wages or levy your bank account. But if your foreclosed property is sold for more than you owed on the mortgage, the extra money is called a surplus or surplus fund.
In a nonjudicial foreclosure, the lender will appoint a foreclosure trustee to move the process forward. In a judicial foreclosure, the court does this. In either case, you will be given the contact information of the trustee or officer who sold the property. You should track the foreclosure process carefully and contact this person to find out whether the auction resulted in excess funds.
Surplus funds after a foreclosure sale are calculated by subtracting the outstanding loan balance from the sales proceeds and then adding any costs the lender had to pay to foreclose on the property. If there are any junior liens, those get paid next. Finally, you’ll get paid if there are any funds left.
Whether you’re entitled to surplus funds will depend on who else has a claim on your home. Any claim against your house is usually recorded as a lien by the lienholder in the land records at your county clerk’s office. The first recorded lien is often your mortgage lender. The lender will get paid first from the proceeds of a foreclosure sale after any special debts like property taxes are paid.
You may have other claims on your home if you took out a second mortgage or you have a credit card judgment lien. These are called junior liens. Junior lienholders — also called subordinate lienholders — get paid after the first lienholder gets paid. At this point, you’re then entitled to any excess proceeds. But if there are any junior lienholders, you’re not likely to receive any surplus funds from the foreclosure.
How To Claim Surplus Funds
If there are excess proceeds from a mortgage foreclosure sale, they’ll be held by a trustee or deposited with the court. This gives you an opportunity to make a legal claim for the funds. The trustee or officer should send a notice of the surplus to your last known address. If your house is sold in a foreclosure auction and you don’t receive this notice promptly, you should call the number on your prior notices. Foreclosure surplus fund scams do exist, so be sure to examine your mail carefully and contact the trustee or officer if something doesn’t seem legitimate.
To recover surplus money from a foreclosure sale, claimants must act quickly. There will be a limited window for you to recover the funds. You’ll also need to provide proof of prior ownership to the trustee or the court. You may also have to complete and submit a claim form and/or attend a court hearing. If the surplus funds are not properly claimed, they will be treated by the court as unclaimed property.
When a mortgage holder sells real estate at a foreclosure auction, the selling price will determine whether the borrower gets any proceeds from the sale. If the borrower owes more than the sale price, in some states the bank can pursue the borrower in court for the deficiency.
If the property sells for more than the borrower owes, that borrower could be entitled to the surplus funds. After the mortgage holder’s expenses and any subordinate lienholders are paid, the borrower can apply to either the foreclosure trustee or the court to receive the funds leftover from the sale. The borrower will likely need to complete a form, provide proof of prior ownership, and attend a hearing.