What Is a Mortgage Surplus?

Unexpected circumstances may occur, and you may experience financial difficulties and become delinquent on your mortgage. If you are unable to cure the mortgage default or negotiate a modification of your mortgage loan, the lender may initiate the steps to foreclose and sell the property at a foreclosure auction. As a result of a foreclosure, you'll inevitably lose your investment and equity in the home, but you'll be relieved of the obligation to repay the debt if the lender sells the home for an amount that covers the mortgage debt.

For each property at a foreclosure auction, there is an initial minimum bid amount, and each bidder has the right to offer a higher amount than the previous bidder. Each bid is an irrevocable offer to purchase the property. The amount of the highest bid may surpass the remaining amount of the loan. When this happens, the lender will receive the cash proceeds of the sale, which cover the total mortgage debt plus additional funds.

The foreclosure sale allows the lender to recover the outstanding balance on the mortgage. The lender may set the starting bid for the amount of the mortgage debt plus additional interest charges and other fees. Sometimes the successful bidder at a foreclosure auction overbids and agrees to purchase the home for more than the outstanding mortgage balance. When a property is sold at a foreclosure auction for an amount that is greater than the accrued balance of the mortgage loan, the difference between the amount the house was sold for at the foreclosure sale and the loan balance is the mortgage surplus.

You may be entitled to the entire amount of the mortgage surplus if you're the prior owner of record. However, if there are subordinate lienholders with liens against the property, the surplus funds will be disbursed in the order of priority of each lienholder. For instance, if there is a second mortgage, the surplus funds first go towards paying the balance of the second mortgage. If there are any funds remaining after junior lienholders are paid, you are obligated to this portion of the mortgage surplus.

In both judicial and nonjudicial foreclosure states, the previous homeowner must be notified of any surplus funds. If you believe that there is a mortgage surplus resulting from a foreclosure sale of your home, you may contact the court that handles the disbursement of surplus funds in judicial foreclosure states or contact the surplus trustee in nonjudicial states to determine if you are entitled to any amount of the surplus funds. If you are due a refund, you'll need to ask how to apply for the surplus, as each state has their own set of requirements for claiming the money.