A foreclosure ends with a trustee's sale, where the highest bidder receives the property. The disbursement of funds from the sale pays off the mortgage. If any monies remain after paying the mortgage, then a mortgage foreclosure surplus exists.
Disbursement of Funds
A mortgage foreclosure surplus pays the liens on a property, usually in the order the liens were recorded in public records. Some exceptions apply.
State Property Taxes
State property taxes take precedence over any lien recorded on a property. The state can record the lien against the property for property taxes just days before the trustee's sale, and it will get paid first.
The first loan obtained to purchase the property usually records as the first lien holder, who receives the money from a trustee’s sale after state property taxes. A second loan obtained either as a down payment, home equity line, or debt consolidation typically records immediately after the first loan and is paid next.
Remaining funds pay any judgments as a result of an award from small claims court, such as medical bills, credit card collections or monies owed to businesses for services performed.
The Internal Revenue Service can claim ownership to a property sold at a trustee’s sale within 120 days to satisfy any income tax liens of the previous owner.
Finally, the person who lost his property in a trustee’s sale receives whatever money remains.
- Florida Bar Journal: Disbursement of surplus proceeds from a foreclosure sale
- David B. Schachter; attorney-at-law; New York
Angela Lam Turpin has been a writer for 20 years. Her articles and essays have appeared in "San Jose Mercury News," "The Sun," and in the book, "Wild Child: Girlhoods in the Counterculture" (Seal Press). She is a licensed Realtor (CA Dept of Real Estate License #01201734) experienced with residential sales, mortgage loans, and foreclosures.