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. Foreclosure sales are typically public auctions.
Anyone, including the foreclosing lender, can bid on the home at a foreclosure sale. Usually, the lender bids on the property using what's called a "credit bid." If the lender's credit bid is highest bid at the foreclosure sale, the lender gets the property.
People who take out a home loan 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 loan payments or violate the agreement in some other way.
State law, in large part, governs the foreclosure process. The procedure 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.
But 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 specific out-of-court steps to foreclose. State law describes 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.
A foreclosure auction is open to the public. The sale usually takes place in the sheriff's office or at the county courthouse, often on the front steps. Sometimes, foreclosure auctions are online. Online foreclosure auctions are becoming common.
After the sale, a deed is issued that puts the home's title in the high bidder's name. The deed is then recorded in the county records.
With a credit bid, the lender bids the debt that the borrower owes at the foreclosure sale. Basically, the lender gets a credit in the amount of the borrower's debt.
Only the mortgage lender, which has a secured lien on the property, can credit bid for its collateral (the home). So, at the foreclosure sale, the lender is allowed to make a credit bid.
Other parties who bid on a property at a foreclosure sale, like members of the public or a nonforeclosing junior lienholder, 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.
The lender can credit bid as high as the amount owed on the promissory note, plus accrued interest, late fees, and foreclosure costs, without having to come up with actual cash at the sale.
Also, if the foreclosing lender wants to bid over what it's owed for some reason, that lender can come to the sale with a cashier's check just like any other third-party bidders.
A "specified bid" means that the lender has specified the amount of its bid. The term "specified bid" is used to indicate that the lender's opening bid is less than the amount owed to the lender.
Usually, though, the lender will bid up to the amount owed when other bidders are present with a "reserve credit bid."
With a "full debt bid," the opening bid covers the full debt. If the homeowner has equity in the property, the lender will probably make a full debt bid.
Again, while the lender can credit bid the full amount of the debt at the sale, including foreclosure fees and costs, 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 the lender can get a deficiency judgment depends on state law.
Typically, the foreclosing lender is the high bidder at a 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.