Foreclosure has to be one of the most dreaded words in the ears of a homeowner. No one wants to lose their home, but it unfortunately happens in the United States more than you would think.
As of April 2021, the Foreclosure Market Report showed that over seven million U.S. properties have been taken back by lenders through foreclosure. When this happens, the lender sells the home that was used as collateral for the defaulted loan, and then uses the money to repay back interest, principal and related fees.
While the borrowers may have been qualified at the time they took the home loan, life can throw some curveballs that cause people to default on their mortgage payments. Job losses, medical emergencies, and excessive debt are all possible reasons that a borrower might throw in the towel and give up paying a loan.
Most people want to know if they lose everything in the event of a foreclosure. Theoretically, a homeowner could get some money back if the bank sale results in excess proceeds after repayment of the loan. In reality, however, this rarely happens. If a loan is so far into debt that a lender is forced to foreclose, chances are the proceeds from the sale will be less than the debt owed.
What Happens If There Are Excess Proceeds?
If there is a foreclosure sale, and the lender receives more money from the sale than the outstanding debt, the lender is not allowed to pocket the difference. The purpose of a foreclosure sale is to recover the outstanding balance after a default in payment. Along with the mortgage balance, the lender seeks to recover the costs related to the foreclosure and selling process. If the sale results in excess proceeds, the borrower is entitled to it.
But there are conditions attached to receiving any extra proceeds. If the house was pledged as collateral for a second loan, that loan must be paid off first with any excess amount left over. Or a court may give a creditor the right to possess your real estate or personal property after you’ve failed to meet your contractual obligations. In this case, after your house is foreclosed, the creditor also gets their share of the funds before you. Any amount left after all of the secured debts are paid is then yours to keep.
What Happens If The Proceeds Are Less?
If the funds from the foreclosure aren’t enough to cover the outstanding debt, there will be a deficiency. In most cases, you are still responsible for covering the shortfall.
But if you reside in certain states like California, state laws provide more protection for borrowers than lenders. Lenders are not allowed to collect the deficiency from you if the foreclosed home was your primary residence. Because there is very little affordable housing in San Diego, these laws can help a borrower hold onto their home during difficult times. If it was an apartment complex, investment, or commercial property, the defaulted borrow is still on the hook for any outstanding balances after foreclosure.
The Truth About Foreclosure
You need to understand that lenders don’t want to foreclose if they don’t have to. It is a time consuming and costly process for them. Buying or selling through a home auction may also not generate the market value of the house.
Because of all this, lenders are usually willing to work with a defaulted borrower—and take the foreclosure route only as a last resort. The moment the lender notices a borrower is struggling or stops making payments, they may try to restructure the loan by lowering or delaying the payment schedule. Some lenders might even go as far as offering financial counseling or suggesting government mortgage relief programs. Only when all else fails do lenders proceed with foreclosure.
Being faced with a foreclosure is a very stressful ordeal. The thought of losing a home is terrifying to any homeowner. However, it’s important to know what to expect during and after a foreclosure. If the lender receives excess funds that are more than enough to pay the outstanding loan balance, you can then receive the extra cash provided you didn’t use the home as collateral for another loan and you don’t owe other creditors.
On the other hand, if there is a deficiency from the sale, you may be protected by the law. Whichever the case, it pays to know the foreclosure process in your state and its implications. Foreclosures can be tricky, and it’s best to engage the services of a foreclosure lawyer to help you navigate the process smoothly and fairly.