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Foreclosure and Homestead Exemptions

Many, but not all, states have homestead exemptions that protect the home in which a family lives from being sold to satisfy debts held by judgment creditors. Homestead exemptions do not protect the family from foreclosure by the mortgage holder or the trustee under a deed a trust where the home secures a loan for the purchase money.
Although the amount of the homestead exemption varies greatly from state to state, the manner in which it is used in distributing the proceeds of a foreclosure sale are comparable. When a trustee or mortgagee seeks foreclosure of a mortgage in default, proceeds are first applied to the cost of foreclosure, including advertising and attorney fees. The proceeds are next used to pay off the mortgage indebtedness, the amount still due and owing on the mortgage. Proceeds are next distributed to the homeowner, to the extent of the homestead exemption.
Only after credit or distribution is made to the homeowners and there are any excess proceeds left is the excess available to judgment creditors.
For the homeowners to take advantage of the homestead exemption, the homeowners must actually live in the property in question. In addition, the homeowners must comply with any conditions or procedures required by the state law or the homestead exemption might be waived or found to be inoperable.
Some states may give a break on property taxes on homestead property. These laws do not protect the homeowners from foreclosure by a judgment creditor. Some states provide both a property tax break and a homestead exemption; others may provide one or the other, but not necessarily both.