Although many properties currently in foreclosure have little equity or are actually upside down (homeowners owe more on the loan than the home is worth), a significant number of homeowners have a large equity position in their homes. But when the bank forecloses and attempts to put the property up for sale, foreclosure victims often discover two of the most troubling truths about the foreclosure process. Banks can eat up the property’s equity throughout the process, and properties often sell at the trustee’s sale for much less than the owners expect.
In general, when a homeowner has a large amount of equity in the property, they have more options to stop foreclosure than if they did not have the equity. Qualifying for a foreclosure loan is often much easier if the property has more than 25-30% equity. Although these loans can be quite expensive, they allow for a short-term solution whereby homeowners will pay off the old mortgage, start paying off a new loan on time, and save their home. Another option that is enhanced with a large capital position is to sell the property outright. In this case, foreclosure victims can drive the price of their home down to a minimum, attracting buyers looking for a deal. Although sellers may walk away with little or no proceeds from the sale, they will have paid off the loan in full and avoided the tax consequences of a short sale.
However, when the property has significant equity and the owners cannot find a solution to avoid foreclosure, there are three considerations that must be taken into account. First, as soon as the loan goes into foreclosure, the mortgage company will begin accelerating late fees, interest, court costs and attorney fees, as well as any other miscellaneous fees. This quickly begins to eat away at any equity the homeowners may have had, and the longer the home is in foreclosure, the higher these fees can be. Homeowners who can’t put together a plan to avoid foreclosure can quickly find they’re locked in the house, because they owe so much that they have no options left.
The second consideration relates to property being sold prior to the judicial sale. Once the home is sold, any proceeds from the sale in excess of what is needed to pay the mortgage and associated closing costs will go to the sellers. In this case, the patrimony that remains is paid to them through the sale. However, combined with the acceleration of the loan by the lender, it is important that homeowners list the property immediately and try to find a buyer as quickly as possible. Starting low is sometimes better than starting high, as accelerating rates will eventually cause homeowners to have to raise the price, just to be able to pay off the loan and be left with nothing.
Finally, if homeowners can’t use their equity to qualify for a loan to stop foreclosure or sell the home, there’s little chance they’ll make a profit from the sheriff’s sale. At this point, the mortgage company will have added as many fees and costs as legally possible, so it’s unlikely the property will be auctioned for an amount that pays off the loan in full. In addition, the lender himself is often the only bidder on the sale, and his maximum offer is often less than what is owed, or exactly what is owed, leaving homeowners with nothing. Worse still, if the house sells for less than what is owed, there is a chance of being sued post-foreclosure for deficiency judgment (although this rarely happens in reality).
However, in the rare event that a bidder offers more than what is owed on the loan, the owners will receive the proceeds of the sale. If money is left over after property taxes are paid, the first mortgage is paid in full, and any other liens (second mortgage, civil judgment, etc.) are settled, previous foreclosure victims can claim their proceeds. Quite often, the county court will not inform homeowners that they are owed money, so it is up to the foreclosure victims themselves to follow up on the outcome of the sheriff’s sale. Even a few thousand dollars can help after a foreclosure, whether it’s in terms of finding a new place to rent or starting an emergency fund and savings plan.
In the end, the bank does not directly have any equity rights in a property that is being repossessed. However, they will legally go to great lengths to gobble up the equity, so that they can claim the proceeds from the sheriff’s sale. If homeowners want the equity in their home to remain theirs, they must find a solution to foreclosure as quickly as possible and use available resources while they still have time. As the sheriff’s sale approaches and the payment escalates ever higher, foreclosure victims will often run out of options to avoid foreclosure at exactly the moment when they run out of time to save their homes.