What Happens to Equity during Home Foreclosure?

If you are facing home foreclosure, you may be wondering what will happen to your equity. In most cases, equity will disappear. However, the results depend on the situation of the homeowner.

Understanding Home Equity

Equity is the difference between your home’s current market value and the loan you own on it. It is the market value of your unencumbered interest in your property. In essence, it is the difference between the market value of your property and the balance of all liens on your home.

There are basically two sources where you can acquire equity. The first is through the difference between the market value of your property and your mortgage loan. As you continue to make payments on your mortgage, your home equity increases. Another source is if the value of your home increases. If the value of your property increases, the possibility of a higher sale is greater, equating to a higher home equity.

Before Home Foreclosure

In the event that you are not able to make payments on your mortgage for a specific number of times, your lender will place your mortgage loan in default. The requirements for putting a property in default depends on the state, but generally if an indicated number of payments have not been made the lender can put your property in default.

Once the property is in default, the lender can then begin the process of home foreclosure. However, it is important to remember that during the foreclosure process your equity is being reduced. These reductions are based on any penalties or fees you may have incurred due to late payment. This amount is added to your total loan and is then deducted from the sale proceeds, which in turn, reduces your equity.

During Foreclosure

During the process of foreclosure, your lender may charge other fees, including processing fees related to the foreclosure. This amount is reconciled once the home foreclosure sale has been made.

The process of home foreclosure begins when the lender takes over your property and lists it for sale. The price the lender can put on a particular property has a limit, which is generally near the fair market value of the property.

Depending on how big your equity is on the property, the lender will often push for an immediate sale. If your equity is low, there is no need to rush the sale of your property. On the other hand, a bigger equity means you have a greater interest in the sale of your property, but the lender may take their time to sell your home to recover a bigger portion of the loan.

After Foreclosure

Once a property is foreclosed, your equity will be what is left after the lender has deducted all fees due to them. This includes the mortgage loan, processing fees of the home foreclosure, any late payment charges and default declaration.