When a foreclosure sale results in surplus funds (money over and above what's needed to pay off all the liens on the property), this extra money belongs to you (the homeowner), not the lender.
Depending on state law and the circumstances, a foreclosure is either judicial or nonjudicial. Judicial foreclosures go through state court, while nonjudicial foreclosures happen without court oversight.
At the end of the foreclosure process, a trustee or an officer of the court, like the sheriff, will typically conduct a foreclosure sale. (In two states, Connecticut and Vermont, a judge who approves a foreclosure can give the home's title directly to the lender.)
Sometimes, a property sells at a foreclosure sale for more than the borrower owes on the mortgage loan. In other cases, the property sells for less than the borrower's total debt.
If the purchase price at the foreclosure sale exceeds the borrower's loan balance, this extra amount is called "excess proceeds" or "surplus funds."
After a foreclosure, any surplus funds get distributed to lienholders and the former homeowner.
Say your home sells at a foreclosure sale for $550,000. You owe the foreclosing lender $525,000. The additional $25,000 is surplus funds.
The laws that govern foreclosure surplus funds vary from jurisdiction to jurisdiction. State law generally says how surplus funds get distributed.
Again, if a foreclosure sale results in excess proceeds, the lender doesn't get to keep that money. The lender is entitled to an amount sufficient to pay off the outstanding balance of the loan plus the costs associated with the foreclosure and sale—but no more.
So, you might get some money if your house is foreclosed, particularly if you don't have any other liens on your home.
Generally, if any junior liens were on the home, like a second mortgage, HELOC, or a creditor recorded a judgment lien against the property, those parties get the first crack at the surplus funds. Then, any excess proceeds left over after paying off these liens belong to the former homeowner.
For example, Jack and Georgia go through a foreclosure. At the foreclosure sale, their home sells for $550,000. The loan balance they owed the foreclosing lender at that time was $525,000. This means that the sale resulted in surplus funds of $25,000.
The property was also subject to a second mortgage for $15,000 and a judgment lien for $5,000 due to unpaid credit card debt. So, in this situation, $525,000 goes to the foreclosing lender, $15,000 goes to the second mortgage holder, and $5,000 to the judgment creditor. Jack and Georgia can claim $5,000.
However, a junior lienholder could lose its rights to the excess proceeds if it doesn't respond to judicial foreclosure proceedings or follow the correct procedures for claiming the surplus.
On the other hand, if your property is foreclosed and sells for less than you owe on the mortgage, the unpaid portion of the loan is called a "deficiency." Depending on state law and the situation, the lender might be able to get a deficiency judgment against you for this amount.
You (the foreclosed homeowner) have to make a claim to get your share of surplus funds from a foreclosure. You'll need to act quickly to claim surplus funds after a foreclosure. A limited amount of time will be available for you to get the funds. The exact amount of time you'll get depends on state procedures.
You can apply to either the foreclosure trustee or the court to get the foreclosure excess proceeds.
Again, the procedures for distributing and claiming surplus funds after a foreclosure sale differ from state to state. Claiming surplus funds is sometimes a complicated process that can be confusing for homeowners, especially after the stress of going through a foreclosure.
Talk to a lawyer if you need help getting the excess money after a foreclosure. Foreclosure lawyers often handle surplus funds claims, ensuring that foreclosed homeowners recover the money they're entitled to after a foreclosure.
What happens to unclaimed surplus funds from a foreclosure sale depends on the specific laws and regulations in the jurisdiction where the sale happened. Usually, unclaimed surplus funds go to the state's unclaimed property division. You might still be able to access the funds if you find yourself in this situation.
Typically, if a foreclosure sale has surplus funds, the trustee or other sale officer must send a notice to the foreclosed homeowner's last known address. But the last known address is usually the foreclosed property.
Because most people don't realize they're due any excess proceeds, they tend to vacate a foreclosed property without leaving a forwarding address. So, they might not receive important notices about the distribution of foreclosure proceeds.
Because you don't know whether a foreclosure sale will generate surplus funds, it's a good idea to track the foreclosure process as it goes along. Take note of the foreclosure sale date, which will be in the foreclosure documents you receive.
After the auction, contact the trustee or officer who sold the property. This information, including the trustee or officer's name and phone number, should also be in the paperwork you received during the foreclosure and in your local newspaper's legal section where the sale notice was published. Call your loan servicer if you can't figure out who conducted the sale or how to contact that person.
Then, ask the trustee or officer if the auction resulted in excess proceeds.
If the sale had surplus funds, give the trustee or officer your new address. Follow up with a letter sent by certified mail, return receipt requested, and regular mail, including your new address and contact information.
Also, when you call the trustee or sale officer, ask what you need to do to claim your share of the proceeds.
You could face tax consequences if you receive foreclosure surplus funds. The IRS might consider it taxable income, and you might need to report it on your federal tax return, which could increase your overall tax liability in the year you get the funds. The money could be taxable at the state level, too.
Talk to a tax professional to learn more about the tax implications of receiving surplus funds after a foreclosure sale.
Here are a few typical mistakes people make when claiming foreclosure surplus funds.
If you don't act quickly, you could miss the deadline to claim the funds.
Many people underestimate how complex the procedures for claiming surplus funds will be.
Because the procedures for claiming surplus funds can be complex, getting a lawyer to help you navigate the process is best.
In addition to avoiding the pitfalls discussed above when claiming surplus funds, you need to beware if you get a letter from an out-of-state company saying it will help you claim any surplus funds after you go through a foreclosure.
These letters are typically from for-profit companies or individuals with no legal training. But they'll claim they can locate excess proceeds and distribute them to you for a fee. These companies tend to be predatory and aren't affiliated with the court, trustee, or your lender. It's best to avoid dealing with them.
Consult a foreclosure lawyer if you need help recovering surplus funds after a foreclosure. If you can't afford to hire a lawyer, you might qualify for free assistance from a local legal aid office.