Foreclosure Surplus Funds (2024)

Find out how to claim surplus funds from a foreclosure.

If you default on your mortgage payments, the lender 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 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.

How Foreclosure Sales Work

Depending on state law and the circ*mstances, 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.

What Are Foreclosure Surplus Funds?

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.

How Are Surplus Funds Calculated?

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.

What Are the Laws Governing Foreclosure Surplus Funds?

The laws that govern foreclosure surplus funds vary from jurisdiction to jurisdiction. State law generally says how surplus funds get distributed.

Who Gets Foreclosure Surplus Funds?

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.

If You Have a Second Mortgage or 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.

Deficiency After a Foreclosure Sale

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.

How Much Time Do I Get to Claim Excess Proceeds?

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.

What Is the Process for Claiming Foreclosure Surplus Funds?

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 If I Don't Claim Foreclosure Surplus Funds?

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.

How to Find Out If Your Foreclosure Resulted in Excess Proceeds

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.

Track the Foreclosure Process to Learn About Surplus Funds

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.

What to Do If the Sale Generated 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.

What Are the Tax Implications of Receiving Foreclosure Surplus Funds?

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.

What Are the Common Mistakes People Make When Claiming Foreclosure Surplus Funds?

Here are a few typical mistakes people make when claiming foreclosure surplus funds.

Failing to Act Quickly

If you don't act quickly, you could miss the deadline to claim the funds.

Underestimating How Complicated the Process Is

Many people underestimate how complex the procedures for claiming surplus funds will be.

Attempting to Claim Funds Without the Help of an Attorney

Because the procedures for claiming surplus funds can be complex, getting a lawyer to help you navigate the process is best.

What Are the Things to Keep in Mind When Claiming Foreclosure Surplus Funds?

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.

Get Help Claiming Foreclosure Overages

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.

Given your interest in surplus funds from foreclosure, it seems like you're delving into the complex landscape of property laws and financial proceedings post-foreclosure. Here's a breakdown of the concepts mentioned in the article:

Foreclosure Process: This encompasses both judicial and nonjudicial foreclosure, where the property is either sold through state court oversight or without it, respectively.
Surplus Funds: Money left over after a foreclosure sale that exceeds what's needed to pay off the liens on the property. This surplus typically belongs to the homeowner.
Calculating Surplus Funds: Determined by subtracting the outstanding loan balance from the sale price of the foreclosed property.
Distribution of Surplus Funds: Detailed by state laws, surplus funds are usually distributed to various parties, including lienholders and the former homeowner.
Junior Liens: Other claims against the property, like second mortgages, HELOCs, or judgment liens, often have precedence in claiming surplus funds before the former homeowner.
Timeframe for Claiming Surplus Funds: Homeowners need to promptly claim surplus funds post-foreclosure within the stipulated time frame as per state procedures.
Process of Claiming Surplus Funds: This involves application to the trustee or court handling the foreclosure sale, but the process varies widely across states and can be intricate.
Unclaimed Surplus Funds: If unclaimed, these funds might be transferred to the state's unclaimed property division, potentially still accessible by the homeowner.
Tax Implications: Receiving surplus funds might have tax implications, possibly leading to increased federal and state tax liabilities.
Mistakes and Common Pitfalls: These include not acting promptly, underestimating the complexity of the process, and attempting to navigate it without legal assistance.
Caution Against Predatory Entities: Beware of for-profit companies offering to help claim surplus funds for a fee post-foreclosure; these entities might not have legal affiliations and could be predatory.
Legal Assistance: Seeking guidance from foreclosure lawyers or legal aid offices can aid in navigating the surplus funds recovery process.

Understanding these concepts can significantly impact your ability to navigate the aftermath of foreclosure, claim any surplus funds rightfully owed, and avoid potential pitfalls or exploitation by predatory entities in the process. If you're considering claiming surplus funds, ensuring a solid understanding of these aspects is crucial.