A foreclosure sale occurs when the bank exercises its "lien" rights and sells a home at auction. The bank obtains a lien (an ownership interest in the property) when a borrower takes out a mortgage. The lien helps protect against a significant loss by allowing the bank to foreclose on the house and sell it at auction if the borrower stops making the agreed-upon payment (defaults on the loan).
The lien doesn’t allow the bank to sell the home at a foreclosure sale immediately after a default, however. Instead, a home lender must follow federal and state foreclosure laws.
Federal law (as of January 2017) prohibits a bank from initiating foreclosure proceedings before a homeowner’s mortgage payment is 120 days past due. The purpose of the federal waiting period is to help the homeowner stay in the home. The extra time gives the owner a chance to find a way to bring the loan current or to apply for a loss mitigation program.
After the 120-day waiting period elapses, the lender can start foreclosing by following the law of the state where the house is located. The bank will use either a judicial or nonjudicial foreclosure procedure, depending on the particular state’s process.
A judicial procedure starts when the lender files a lawsuit in court. If the bank wins, the court will order the home sold at a foreclosure sale.
If the bank uses a nonjudicial procedure, it will follow steps outlined in state law. In most cases, the lender must notify the borrower of the default, give the borrower a short amount of time to bring the account current, and notify the borrower (and possibly the public) of the foreclosure sale date. After completing the steps, the bank can proceed with the foreclosure sale without court approval.
(If you’d like to learn about foreclosure law in your state, read State Foreclosure Laws.)