Although many properties that are currently in foreclosure have little equity or are actually upside-down (the homeowners owe more on the loan than the home is worth), a significant number of homeowners have a large equity position in their houses. But when the bank forecloses and attempts to bring the property to a sheriff sale, foreclosure victims often find out two of the most troubling truths about the foreclosure process. Banks are allowed to eat up the equity in the property throughout the process, and properties often sell at the trustee sale for far less than the homeowners 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 the homeowners will pay off the previous mortgage, start paying a new loan on-time and save their home. Another option that is enhanced with a large equity position is selling the property outright. In this case, the foreclosure victims can lower the price of their home down to the minimum, enticing buyers who are looking for a deal. Although the sellers may walk away with little or no proceeds from the sale, they will have paid the loan in full and avoided any tax consequences from a short sale.

When the property has significant equity and the homeowners are unable to work out a solution to avoid foreclosure, though, 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 costs, as well as any other miscellaneous charges. This quickly begins to eat away at any equity the homeowners may have had, and the longer the house is in foreclosure, the higher these fees can go. Homeowners who are unable to put together a plan to prevent foreclosure quickly may find that they are locked into the home, because they owe so much that there are no options left.

The second consideration relates to the property being sold before sheriff sale. Once the house is sold, any proceeds of the sale over and above that necessary to pay off the mortgage and associated closing costs will go to the sellers. In this case, the equity that they have left is paid to them through the sale. Combined with the lender's acceleration of the loan, though, it is important that homeowners list the property for sale immediately and attempt to find a buyer as quickly as possible. Starting with a low price is sometimes better than starting high, as the acceleration of fees will eventually make it necessary for the homeowners to raise the price, just to be able to pay off the loan and walk away with nothing.

Finally, if the homeowners are unable to use their equity to qualify for a loan to stop foreclosure or sell the house, there is little chance they will get any proceeds from the sheriff sale. By this point, the mortgage company will have added in as many fees and costs as they legally can, so it is unlikely the property will be auctioned for an amount that will pay off the loan in full. In addition, the lender itself is usually the only bidder at the sale, and their maximum bid is often less than what is owed, or exactly what is owed, which leaves the homeowners with nothing. Even worse, if the house sells for less than what is owed, there is the possibility of being sued after the foreclosure for a deficiency judgment (although this rarely happens in reality).

In the rare instance when a bidder does offer more than what is owed on the loan, though, then the homeowners will receive the proceeds from the sale. If there is any money left after property taxes are paid, the first mortgage is paid in full, and any other liens (second mortgages, civil judgments, etc.) are cleared off, the former foreclosure victims can claim their proceeds. Very often, the county courthouse will not inform the homeowners that they are due any money, so it is up to the foreclosure victims themselves to keep track of the outcome of the sheriff sale. Even a few thousand dollars can help after foreclosure, either in terms of finding a new place to rent or beginning an emergency fund and savings plan.

In the end, the bank does not directly have any rights to the equity in a property that is being foreclosed. However, they will do as much as legally possible in order to eat away at the equity, in order that they will be able to claim the proceeds from the sheriff sale. If homeowners want the equity in the house to remain theirs, they need to come up with a solution to the foreclosure as quickly as possible, and utilize the resources available to them while they still have time. Once the sheriff sale comes closer and the payoff creeps higher and higher, foreclosure victims will often run out of options to avoid foreclosure at exactly the time they run out of time to save their homes.

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