If my mortgage were to be foreclosed prior to completion of repayment, would I receive any cash value back for the payments I have made?

First: This is hypothetical, more of a curiosity than something I need actual help with.

Lets say I had a 100k house, and over the past 10 years I’d paid down 50% of the value of the house — That is to say ignoring interest, I own 50% and the bank owns 50%.

If I were to lose my job and get foreclosed, the bank probably wouldn’t be interested in busting out a chainsaw to cut the house in half — they’d take possession of 100% of the property.

Would the bank at that time (or any other) have to pay me back the 50% of the house I own? If not, how would this be handled?

3 thoughts on “If my mortgage were to be foreclosed prior to completion of repayment, would I receive any cash value back for the payments I have made?

  1. Acccumulation

    The simple answer is “yes”. The real-world answer is that what happens is:

    (1) You miss a payment.
    (2) They send you a bill the next month for two months’ payment, plus late payment fees.
    (3) You don’t pay that bill.
    (4) The bank sends increasingly serious letters to you asking for their money.
    (5) At some point, the bank gives up on trying to work out a payment plan for you.
    (6) The bank starts foreclosure proceedings.
    (7) The bank pays a bunch of court fees, hires a lawyer, and spends several months going through the foreclosure process. The bank continues charging you late fees throughout this time, and may have other fees as well.
    (8) The court awards the bank title.
    (9) The bank auctions the house, often at a significant discount.
    (10) The bank takes the sale price, subtracts the loan, all the interest charges, the late fees, court fees, lawyer fees, etc., etc., and sends you a check for what’s left over.

    The larger your equity, the longer a bank will tend to spend in step (4), accruing more and more interest and late fees. It’s not really in the bank’s interest to foreclose just because you missed some payments; if there’s enough equity that the bank can be sure of there being money left over after step (10), the optimal result is the bank continuing to charge you late fees until the equity is eaten up. Foreclosure is for when the bank has decided that they would rather have the house than you rack up more debt, i.e., there’s no longer enough equity for them to be comfortable that they can recoup what they’re owed if they wait any longer. So in practice, there generally isn’t much money, if any at all, left over after a foreclosure.

  2. chili555

    In addition to @quid’s answer, what you will get depends on many factors. As has been pointed out, a bank sale is likely to get a distressed, fire-sale price. A pre-forclosure sale is likely to get more. The bank has no incentive to maximize the sale price beyond their owed $50,000.

    The price received at the sale will depend on whether comparable homes in the area have appreciated or depreciated since you bought the home. As well, it will depend on the state of repair and maintenance of your house. As in any real-estate sale, a neat, clean and recently painted home with curb-appeal will usually sell for more than a dirty, abandoned home with multiple repairs needed.

    Although there are fees involved, for simplicity, let’s ignore them for a moment.

    If the home you paid $100,000 for some years ago sells in foreclosure, or any other way, for that matter, for $75,000 and you have a $50,000 outstanding mortgage, you get $25,000.

    Likewise, if it sells for $200,000 and you have a $50,000 outstanding mortgage, you get $150,000.

    Finally, if, because of the loss of your job and the lack of available funds for maintenance and repair, the house sells for $48,000 and you have a $50,000 outstanding mortgage, you will still owe the bank $2,000 and they can be expected to pursue you for payment except for 12 non-recourse states in the USA.

  3. quid

    Very basically, ignoring things like multiple liens, etc. Generally, if you stop paying the bank can go through the foreclosure sale, if the bank sells the property for more than you owe the net, after sale expenses, proceeds are returned to you.

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