Tax Sale vs Mortgage Foreclosure: Key Differences

Not all foreclosures are created equal. Understanding the difference between a tax sale foreclosure and a mortgage foreclosure is crucial because each type has different implications for surplus funds, timelines, and your rights as a former property owner.

This guide breaks down the key differences and explains what each means for your potential surplus fund recovery.

Understanding the type of foreclosure affects how you claim surplus funds

What Is a Mortgage Foreclosure?

A mortgage foreclosure occurs when a homeowner falls behind on their mortgage payments. The lender (bank or mortgage company) initiates legal proceedings to take possession of the property and sell it to recover the outstanding loan balance.

Key Characteristics:

• Initiated by: The mortgage lender or loan servicer
• Reason: Missed mortgage payments (typically 3-6 months behind)
• Process: Can be judicial (court-supervised) or non-judicial depending on state
• Timeline: Usually 6 months to 2+ years depending on state laws
• Sale method: Public auction, often at the county courthouse

What Is a Tax Sale Foreclosure?

A tax sale foreclosure happens when a property owner fails to pay property taxes. The local government (county or municipality) sells the property to recover the unpaid taxes, penalties, and interest.

Key Characteristics:

• Initiated by: County or local government
• Reason: Unpaid property taxes (often 1-3 years delinquent)
• Process: Varies significantly by state — tax lien sales or tax deed sales
• Timeline: Can be faster than mortgage foreclosure
• Sale method: Tax auction, often with different bidding rules

Side-by-Side Comparison

Factor	Mortgage Foreclosure	Tax Sale Foreclosure
Who initiates	Private lender (bank)	Government (county)
Debt amount	Often $100,000+	Often $5,000-$50,000
Surplus likelihood	Moderate	Higher (smaller debt vs. property value)
Claim deadline	Typically 2-5 years	Often shorter (90 days to 3 years)
Legal complexity	Moderate	Can be more complex
Tyler v. Hennepin impact	Applies	Directly addressed by ruling

Professional guidance helps navigate different foreclosure types

Surplus Funds: How Each Type Differs

Mortgage Foreclosure Surplus

In a mortgage foreclosure, surplus funds exist when the property sells for more than:

• The outstanding mortgage balance
• Accrued interest and late fees
• Legal fees and foreclosure costs
• Any junior liens (second mortgages, HELOCs)

Because mortgage balances are often substantial, surplus funds from mortgage foreclosures tend to be less common but can still be significant when property values have appreciated.

Tax Sale Surplus

Tax sale foreclosures often produce surplus funds because:

• Tax debts are typically much smaller than mortgage debts
• Properties often sell for close to market value
• The gap between debt and sale price can be substantial

The Tyler v. Hennepin Impact

The 2023 Supreme Court ruling in Tyler v. Hennepin County specifically addressed tax sale foreclosures. The Court ruled that governments cannot keep surplus funds from tax sales — they must return the excess to the former property owner.

This ruling has had a massive impact on tax sale surplus recovery, as many states previously allowed governments to keep all proceeds from tax sales regardless of the debt amount.

Which Type Applies to You?

To determine which type of foreclosure you experienced:

1. Check your foreclosure documents: They should indicate whether it was a mortgage foreclosure or tax sale
2. Contact the county: The recorder's office can tell you what type of sale occurred
3. Review the sale notice: Tax sales are typically conducted by the county treasurer; mortgage foreclosures by the lender or trustee

Claiming Surplus from Each Type

For Mortgage Foreclosure Surplus:

• Contact the county clerk or court that handled the foreclosure
• Request information about any surplus funds from the sale
• File a claim with required documentation (proof of ownership, ID)
• Be prepared for potential competing claims from junior lienholders

For Tax Sale Surplus:

• Contact the county treasurer or tax collector
• Ask specifically about excess proceeds from your property's tax sale
• File a claim before the deadline (often shorter than mortgage foreclosure)
• Reference Tyler v. Hennepin if you encounter resistance

The Bottom Line

Both tax sale and mortgage foreclosures can result in surplus funds that rightfully belong to you. Tax sales often produce larger surpluses relative to the debt, while mortgage foreclosures may have more complex claim processes.

Regardless of the type, if your property sold for more than what was owed, you likely have money waiting. The key is to act quickly — especially for tax sales, which often have shorter claim deadlines.