If you fall behind in mortgage payments, the lender can't just take your home. Instead, it must go through a specific process, called a "foreclosure," and hold a sale, typically a public auction.
Anyone, including the foreclosing lender, can bid on the home at a foreclosure sale. Usually, the lender will bid on the property using what's called a "credit bid." If the lender is the high bidder at the foreclosure sale, it then gets ownership of the home.
People who take out a home loan generally sign a security instrument, typically either a mortgage or deed of trust. This document gives the lender the right to sell the property through a foreclosure if the borrowers don't make the payments or violate the agreement in some other way.
The foreclosure process is governed, in large part, by state law and will be either judicial or nonjudicial.
The lender starts a judicial foreclosure by filing a lawsuit in court. If the court agrees that the borrowers have breached the loan agreement, the court orders the home to be sold at a foreclosure sale. However, in two states, Connecticut and Vermont, the court may give the home's title directly to the lender. This process is called a "strict foreclosure."
In a nonjudicial foreclosure, the lender follows particular out-of-court steps to foreclose. State law spells out exactly what the lender must do to complete the process.
While the exact steps vary among states, the lender might have to do one or more of the following:
Once the lender completes the state-specific process, a foreclosure sale will take place.
At the foreclosure sale, which is an auction, the lender will usually make a "credit bid." With a credit bid, the lender bids the debt that the borrower owes. Basically, the lender gets a credit in the amount of the borrower's debt.
The lender can bid the full amount of the debt at the sale, including foreclosure fees and costs, or it might bid less. When the winning bid at the foreclosure sale is less than the borrower's total debt, the lender might be able to seek a deficiency judgment against the foreclosed homeowner. Whether or not the lender can get a deficiency judgment depends on state law.
Other parties who bid on a property at a foreclosure sale must bid cash or a cash equivalent, like a cashier's check. If a third party is the high bidder at the sale, the sale proceeds are used to repay the borrowers' debt. If the proceeds aren't sufficient to pay off the full amount of the debt, the lender can, if state law allows it, get a deficiency judgment.
Often, though, the foreclosing lender is the high bidder at the foreclosure sale. After the lender buys the property at the sale and gets title to the home, the property is considered "real estate owned" (REO).
If you've defaulted on your mortgage loan, consider talking to a lawyer to learn about the foreclosure procedures in your state and find out whether you have any potential defenses to the action. You can also ask a lawyer for information about loss mitigation options, like a mortgage modification or short sale.
Or you may contact a HUD-approved housing counselor to learn about foreclosure alternatives.