What happens to your home equity after a foreclosure?

Equity and surplus funds are different numbers

Home equity is what your home was worth minus everything you owed against it, measured while you owned it. Surplus funds are what remains after a foreclosure sale. Three things usually make the surplus smaller than the equity:

• The sale price. Foreclosure auctions often sell below full market value. If the lender's own bid wins at about the amount owed, there may be no surplus at all.
• Added costs. Missed payments, interest, late fees, attorney or trustee fees and the costs of the sale are added to what must be paid first.
• Other liens. In many states, second mortgages, HOA liens and judgment liens are paid from the surplus before the former owner.

An example, with the math shown

These numbers are illustrative. Real cases depend on the state, the debt and the liens recorded against the property.

In this example, the owner had about $105,000 in equity but may recover about $40,000. The difference is mostly the gap between market value and the auction price. That is why selling before a foreclosure sale, when it is possible, usually preserves more equity.

What happens when a foreclosed house sells for more than the mortgage balance?

State law sets the order in which sale money is paid out. North Carolina's statute is a typical example: proceeds go first to the costs of the sale, then to taxes and special assessments unless the property was sold subject to them, then to the secured debt. Anything left is surplus.¹

The person who ran the sale then either pays the surplus to whoever is entitled to it or, when there is doubt, deposits it with the court. In North Carolina, the surplus goes to the clerk of superior court when the owner has died with no personal representative, the people entitled cannot be found, or there are competing claims.¹

Who gets the extra money after a foreclosure?

Generally, lienholders whose liens were wiped out by the sale are paid in order of priority, and the former owner receives what remains. Florida, for example, presumes that the owner of record on the date the notice of the foreclosure case (the lis pendens) was filed is entitled to the surplus after subordinate lienholders with timely claims are paid.² If the former owner has died, heirs or the estate may claim instead.

Read more about who can claim surplus funds and how liens affect them.

Where is the money held?

It depends on how the foreclosure happened. In judicial foreclosures, the surplus is usually deposited with the court clerk. In non-judicial foreclosures, the trustee who ran the sale may hold it, pay it out directly or deposit it with the court. Either way, someone with a legal right to it has to ask for it.

What if nobody claims it?

Unclaimed surplus does not stay available forever. In Florida, surplus that has not been paid out one year after the sale is presumed unclaimed and is reported and sent to the state's unclaimed property program.² Other states have their own timelines. Recovering money from a state unclaimed property program is a separate process.

See how foreclosure surplus differs from tax sale overages and unclaimed property.