In these uncertain economic times many homeowners are wondering what happens to their equity if the bank forecloses. Many questions arise when someone’s home is in jeopardy of foreclosure, such as:
- Does the bank get to keep any extra equity left over after they are made whole?
- Can the bank sell a property for below fair market value after they foreclose?
- Does the previous homeowner have any legal resource if they don’t receive a distribution of excess equity after foreclosure sale?
- Is excess equity passed along to the next buyer?
This blog post attempts to answer questions about the equity of your home in a foreclosure, as it pertains to the state of Florida.
NOTE: The Covid-19 temporary foreclosure moratorium ended September 30th 2021.
What Is Equity?
Equity is defined as the difference between the current market value of your home and the total outstanding debt owed (e.g. mortgage balance, HELOC balance, etc.). Essentially, it’s an asset that represents the part of the value of your home that you own.
Equity has to do with the initial down payment made when you purchased your home, the progression of your debt payments, and the market value of your home.
The equity in your home increases in two ways:
- When you begin to pay down your debt (mortgage, home equity loan/line of credit, etc.), your equity grows.
- When the value of your home increases, so does your equity.
Unfortunately, the equity in your home can also decline, as well. This happens when the value of your home falls faster than the rate you’re paying down the debt you owe against the property.
How Does The Foreclosure Process Work When There Is Equity?
So what happens in a foreclosure with equity in the property? Technically, the equity belong to the previous owner, but it will likely shrink during the foreclosure process.
If you’ve defaulted on your loan, and your home is in foreclosure, there are a few things that could happen. If you are unable to get new financing or sell your home, the lender could attempt to sell your home in auction for less than fair market value. Typically, lenders don’t care if any equity is left over for the previous owner as long as they can sell for enough to get all the money they are owed. Therefore, it’s in a homeowner’s best interest to avoid foreclosure at all costs.
Despite which route your lender takes, after the house is sold and fees/penalties are paid, the money that remains is equity and legally yours. However, there are many things for you to be aware of that could decrease the money you get back.
When Does Equity Remains With the Previous Owner in a Foreclosure?
After the many fees and penalties are deemed paid, any equity that remains belongs to the previous owner. However, it doesn’t typically leave the original homeowner with much money to show for it, especially since the property was likely sold below market value. Additionally, after foreclosure, the previous owner will be responsible for paying any other property liens and any balances associated with home equity lines of credit. Despite your home being sold, your other debtor obligations do not automatically disappear.
What Are Some Ways Equity Can be Reduced By The Foreclosure Process?
The section provides more information on the situations that reduce your home equity during foreclosure.
- Late-payment Fees/Penalties
- Foreclosure and Legal Fees
- Low Property Appraisal And Subsequent Sale Price
Continue reading to learn how each of the above situations can have a large impact on your home equity amid foreclosure.
Late-payment Fees/Penalties
These penalties are written into your home loan contract. Each month you miss payments will be added to the total loan and are subtracted from your foreclosure equity.
Foreclosure And Legal Fees
The fees that will be incurred include legal fees, processing fees for late payments, any expenses incurred to sell the property, HOA fees/penalties, etc. These fees and penalties could add up to tens of thousands of dollars that will be taken from any money owed to the previous owner once the process of foreclosure has been completed.
Low Property Appraisal And Subsequent Sale Price
Once your home is in foreclosure, the lender will schedule a home appraisal. It is important to know that a lender does not want to own your home, and they are looking to sell it as soon as possible. They are likely to accept low appraisal offers to get it sold in auction quickly, which means less money left over following the payment of loan and fees.
Protecting Your Home Equity When Facing a Foreclosure
Now that you have a better understanding of what happens to home equity in foreclosure, let’s review your options to protect your equity.
- Sell the house before the foreclosure sale
- Refinance your mortgage or loan
- Loan modification
Sell the House Before the Foreclosure Sale
The faster you can sell your property, the fewer fees and penalties will build up during the foreclosure process. You have the option to sell your home right up until the time in which it is sold at auction. This is called the pre-foreclosure stage. Please visit our Sell Your Home page to learn more about a fast and easy option to sell your home.
Refinance your mortgage or loan
You could try to get a more affordable mortgage by refinancing your home before foreclosure sale. However, you will likely not be able to refinance if you have already missed multiple payments, due to your credit worthiness already being damaged.
Loan Modification
This is an amendment made to the terms of the existing mortgage by attempting to renegotiate those terms with your existing lender(s). It could involve a myriad of different elements, including extension of the loan repayment period, reduction of the interest rate, change of the loan type or all three.
If you found this post useful, please check out other blog posts (e.g. Understanding And Reducing High Property Insurance Cost In Florida) for additional content.