What Happens to Equity During Foreclosure?
Home equity stays the property of a homeowner even in the event of a mortgage default and foreclosure on the home. But the foreclosure process can eat away at the equity. The following five points explain what home equity is, what happens to it during foreclosure and options to protect.
What Is Equity?
Equity is the difference between the current market value of your home and the amount you owe on it. It is the portion of your home’s value that you actually own. For example, if you purchased a $200,000 home with a 20 percent down payment of $40,000 and a mortgage loan of $160,000, the equity in your home is $40,000.
In Foreclosure, Equity Remains Yours
Foreclosure is a legal proceeding that follows your being in default on your home loan. What constitutes default varies with each loan and with the laws of each state. But in every case, if you have not made a determined number of payments, the lender places your loan in default and can begin foreclosure.
If you cannot get new financing or sell the home, the lender can sell the home at auction for whatever price they choose. If the home does not sell at auction, the lender can sell the home through a real estate agent.
Remember that equity is what you own of your home’s value. In any of the above cases, if the house is sold and there is money left over after the loan and all fees and penalties are paid, that is equity and that is yours.
Fees Cut Into It
Your equity is being reduced before foreclosure starts. For most home mortgages, there are late-payment penalties. So, if you are late on your loan and it goes into default, for example, after four months of missed payments, the late-payment penalties for those months are added to the total loan amount and will be subtracted from the proceeds of any sale. That reduces your equity.
Additionally, the lender can charge fees related to processing the late payments, the declaration of default, the foreclosure proceedings and expenses of the sale against your equity. This can amount to tens of thousands of dollars, which will be subtracted from anything owed you after a foreclosure sale.
Low Home Appraisals Reduce It
If your home goes into foreclosure, the lender will have the home appraised for an auction sale. Typically, a lender will accept an offer of 90 percent of the home’s appraised value. Lenders do not want to own your home, particularly if it is a time of declining home values. It is typical for the lenders to accept low home appraisal values so that the home will sell at auction and not have to be listed with an agent. That reduced appraisal value means a lower sales price that yields a lower amount of money left over after the loan and fees are paid.
Options to Consider
Before facing foreclosure, refinance your loan to an affordable payment if you can or take advantage of a loan modification program. If this is not possible, sell the home as soon as you can. By selling the home, you are reducing the fees and penalties you owe, setting the price yourself at which you want to sell and avoiding the legal costs of foreclosure. All of this can add to the equity you take out of your home.