If you default on your mortgage loan, the lending bank can go through a specific legal process called "foreclosure" to sell your home to repay the outstanding debt. Depending on state law and the circumstances, the bank will either:
After the bank fulfills all of the legal requirements for foreclosure, the home is sold to a new owner at a public sale. With judicial foreclosures, a sheriff’s sale is customarily used as this last step in the foreclosure process. The successful bidder at the sale becomes the new owner of the property.
A sheriff’s sale is usually an auction, which local law enforcement conducts. The sale is open to the public. The sale typically either takes place in the sheriff’s office or at the county courthouse, frequently on the front steps. Some auctions are held online. Once completed, a sheriff’s deed is issued, giving the home’s title to the high bidder, and the deed is recorded in the county records.
Homeowners generally get notice of a sheriff’s sale in the foreclosure paperwork or through a mailed notice of sale. Also, advertisements of foreclosure sales are normally published in newspapers of general circulation, typically four to six weeks before the sale. Many county sheriffs also maintain a list in their office or on a website of the properties going to auction.
The foreclosing bank submits the first bid at the auction, which is a credit bid. With a credit bid, the bank gets a credit in the amount of the borrower's debt. The bank can bid the full amount of the debt, including foreclosure fees and costs, or it might bid less. Most of the time, the bank is the winning bidder at the sale because no one else tries to buy the property. If the bank buys the property at the sale and gets title to the home, the property is considered “Real Estate Owned” (REO).
When the winning bid at the sheriff's sale is less than the borrower's total debt, the bank might be able to seek a deficiency judgment against the foreclosed homeowner. Whether or not the bank can get a deficiency judgment depends on state law.
After the bank makes its credit bid, another person or entity can submit a higher bid and win the auction. Unlike the bank, a third party will likely need to put down a money order or certified check for a percentage of the property price at the time of the sale. This requirement varies from place to place. Some places require the winning bidder to pay a specified amount, say $10,000, immediately after the sale, with the balance due shortly after that. If the winning bidder doesn’t pay the balance within a set time frame, the deposit might become non-refundable, and the property could be re-listed. Or the purchaser might have to pay the full amount of the winning bid at the time of the sale. The buyer then gets the property in "as is" condition.
If a third party is the high bidder at the auction, the proceeds are used to repay the borrower's debt. But if the sale amount isn’t sufficient to pay off the full amount of the debt, the bank might be able to (again, if state law allows it) get a deficiency judgment against the foreclosed homeowner.
As a homeowner, you can take action to try to prevent a sheriff’s sale from happening and keep your home. You could potentially, depending on your circumstances, as well as state and federal law:
You might, depending on state law, also have options for a brief period after the auction. If state law provides a post-sale redemption period, you can repurchase the home and keep it. Or state law might give you the right to live in the home during the redemption period, even if you don’t exercise your right to redeem. But if you don’t move out when your legal right to occupy the home ends, you’ll most likely get evicted.
Under limited circumstances, you might be able to challenge the sheriff’s sale by filing a motion to set aside (nullify) the sale. A court might set aside the sale if you can show that there was fraud, mistake, or irregularity in the conduct of the sale. For instance, if the bank failed to send you appropriate notice or the auction wasn’t properly advertised in the newspaper as required, these failings can be grounds for an objection to the sale.
As with any legal situation, the law has many nuances and complexities that vary from state to state. If you’re going through a foreclosure and have further questions about the process, consider talking to a local foreclosure lawyer. If you want to learn about different alternatives to a foreclosure, like a modification or short sale, a HUD-approved housing counselor is an excellent resource that will help you at no cost.