Unfortunately, with the state of our world right now, many people are wondering what happens to equity in a foreclosure. Many questions arise when someone’s home is in jeopardy of foreclosure:
- Does the bank retain all of your equity?
- Do you lose equity in foreclosure?
- Is it passed along to the next buyer?
This article will answer all of your questions about the equity of your home in a foreclosure, as it pertains to the state of New York.
Note that the state of New York has added legislation to protect homeowners amid COVID-19 in the COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020. Until May 2021, the act ensures a moratorium on residential foreclosures. This protects homeowners who own ten or fewer residential dwellings, allowing them to file for hardship declarations.
Further, the United States has enacted temporary mortgage relief to protect persons financially impacted by the pandemic. If you own a single-family home backed by a federal or FHA-insured mortgage, you have the right to request home loan forbearance, which pauses your mortgage payments.
If you are facing foreclosure, talk to an attorney as soon as possible to maximize your options. Contact Moshes Law today.
What Is Equity?
Being a homeowner can be a complicated process– there’s so much to understand, so many changes and regulations that impact homeowners. Equity is defined as the difference between the current market value of your property or home and the total you still owe on it. Put simply, it’s the part of the value of your home that you own.
Equity has to do with the initial down payment you invested in your home, the progression of your mortgage payments and the market value of your home. There are two ways that the equity in your home increases. When you begin to pay down your mortgage, your equity grows. Additionally, when the value of your home increases, so does your equity.
Note that the equity in your home can decline, as well. If the value of your property falls faster than the rate you’re paying your mortgage principal, your equity decreases.
Foreclosure with Equity – How Does It Work?
So what happens in a foreclosure with equity in the home? Simply put, the equity remains yours, 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. Note that the lender can opt to sell at any price they choose. If your home does not sell, the lender can sell it through a real estate agent.
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.
The best thing to do is to contact a foreclosure defense attorney in New York as soon as possible. A skilled attorney will help you understand what happens to equity after foreclosure.
What Happens to Home Equity In Foreclosure
You probably know by now that online searching, “what happens to your equity in a foreclosure,” results in various answers of “it depends.” The following sections will walk you through why it depends. Home equity in foreclosure gets eaten into a good amount. When you have equity in your home during a foreclosure, there will be fees and penalties to pay. Additionally, the process and decisions on the selling of your home lies with the lender, which severely limits your options.
When Equity Remains Yours in a Foreclosure
While equity that remains is yours, after the many fees and penalties are deemed paid, it doesn’t typically leave the original homeowner with much money to show for it. Additionally, after foreclosure, you will be responsible for paying any other liens on your home and any home equity lines of credit previously taken out. Despite your home being sold, your other debtor obligations do not disappear.
To reiterate, while remaining home equity after foreclosure is yours, there is typically very little left after all is said and done.
In Which Cases Can Equity be Reduced
The section provides more information on the situations that reduce your home equity during foreclosure.
- Late-payment penalties
- Foreclosure fees
- Low home appraisals
In the following section, the article will walk through how each of the above situations can have a large impact on your home equity amid foreclosure.
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 is an expensive process. Some of 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 could add up to tens of thousands of dollars that will be taken from any money owed to you once the process of foreclosure has been completed.
Low home appraisals
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.
How to Protect Home Equity in a Foreclosure
You know what happens to home equity in foreclosure, now let’s review your options to protect your equity. With all of the obstacles up against homeowners in foreclosure that diminishes home equity, it’s advisable to consult an attorney to understand how to protect your home equity in a foreclosure. You do have a few options to save your home value.
- Sell the house before the foreclosure sale
- Filing for bankruptcy
- Refinance your mortgage
- Loan modification
Sell the House Before the Foreclosure Sale
The quicker you sell your home, the fewer fees and penalties that will build up during foreclosure. You have the option to sell your home up until the time in which it is sold at auction. This is considered pre-foreclosure.
Filing for Bankruptcy
This is another way to protect your home equity from foreclosure. When you file for bankruptcy, the court will instantly release an order for relief, which includes the “automatic stay.” This order states that all creditor attempts to collect must cease, including foreclosure. If you want to keep your home, it’s typically advisable to file for Chapter 13 bankruptcy versus Chapter 7, as it will allow you to catch up on payment in a 3-to-5 year payment plan. However, Chapter 7 doesn’t allow this.
Note that filing for bankruptcy is not a decision to take lightly. Be sure to consult a bankruptcy attorney to better understand your options.
Refinance your loan
You should try to get a more affordable mortgage by refinancing your home before mortgage default. You must do this before entering foreclosure. It’s also best to try to refinance before you have missed any payments, as you are likely to have more options in your court.
This is an amendment made to the terms of the original mortgage. If you are facing mortgage default, this could be a solution for you. 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.
How to Claim Surplus Equity Funds After a Foreclosure
Surplus funds exist when a home is sold for more than the balance of the loan. If those exist, you must act quickly to file a surplus money claim. Obtaining a surplus money claim requires a lot of paperwork and can be quite complicated. It’s best to hire a foreclosure defense attorney to help you through the process and ensure you get any money you have the rights to. Here are the steps to take to secure your surplus monies:
- Hire an attorney
- Provide proof of ownership – this can be done by conducting a title search
- Provide verification of funds – this is found by reviewing foreclosure records and subtracting any loans and liens that are owed
- Contact the trustee
- Submit a claim form to the trustee and court
Do not wait to start this process. There is a time limit, and the court will receive your surplus money, if no claim is filed.
Get Legal Advice about Equity in a Foreclosure
If you are in a foreclosure situation, you are not alone, and you do have options. Calling a foreclosure defense attorney as soon as possible is key to the success of your foreclosure case, as well as helping you in claiming equity from foreclosure. Moshes Law is ready to help you– we’ll fight for you every step of the way as your trusted legal representatives. Call us today at (888) 445-0234 to schedule an appointment to understand what happens to equity in a foreclosure.
In foreclosure, liens recorded post mortgage will be wiped out. Be aware that surplus funds will be distributed to each lien holder based on lien priority, which prioritizes which lien holder gets paid first based on the size of the lien. In other words, the liens will technically be gone because there will be nothing for creditors to have a lien on, however you will still be obligated to pay the debt. Any debt unpaid could result in legal action.
Yes, you can ask. Some lenders will work with you. The key is early communication. Additionally, the United States has enacted legislation protecting homeowners who have been impacted by the pandemic. Under this act, homeowners can request mortgage forbearance.
HELOCs work like credit cards do. During the draw period, which lasts typically 10 to 15 years, you are required to pay interest, which is variable. Once the draw period is over, you start repaying the loan, plus interest.
Yes, if there is surplus money after your foreclosure, you are entitled to it.
No, some states allow foreclosed owners to buy back their home from the bank, however New York is not a Right of Redemption state.