If you default on your mortgage payments, the lender (or the subsequent loan owner) will likely foreclose. In most states, a foreclosure ends with a public auction where the property is sold to a new owner. When a foreclosure sale results in excess proceeds—money over and above what's needed to pay off all the liens on the property—this surplus money belongs to you (the homeowner), not the lender.
How Foreclosure Sales Work
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 a price that's more than what the borrower owes on the mortgage loan. In other cases, the property sells for less than the borrower's total debt.
What Does "Surplus Funds" Mean?
If the purchase price at the foreclosure sale exceeds the borrower's loan balance, this extra amount is called "excess proceeds" or "surplus funds."
For Example:
Your home sells at a foreclosure sale for $350,000.
You owe the foreclosing lender $300,000.
The additional $50,000 is surplus funds.
After a foreclosure, any surplus funds get distributed to lien holders and the former homeowner.
FAQs on Getting Surplus Funds From a Foreclosure
While state procedures for handling and distributing surplus funds vary considerably, here's what generally happens to excess money after a foreclosure and how to claim any foreclosure overages.
Do You Get Any Money If Your House Is Foreclosed?
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 didn't have any other liens on your home. On the other hand, if your property is foreclosed and sells for less than you owed 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.
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What Happens to Excess Proceeds from a Foreclosure Sale?
Generally, if any junior liens were on the home, like a second mortgage or HELOC, or a creditor that 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.
However, a junior lien-holder 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. Also, you (the foreclosed homeowner) have to make a claim to get your share of surplus funds from a foreclosure.
How Much Time Do I Get to Claim Excess Proceeds?
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.