When a borrower defaults on a mortgage loan, the lender or subsequent loan owner, called an “investor,” can use a specific legal process called "foreclosure" to sell the property. (For purposes of this discussion, though, the terms "lender" and "investor" are used interchangeably.) Depending on state foreclosure procedures and the circumstances, the lender will either:
After the lender completes all of the legal requirements, the home is sold at a foreclosure sale. With judicial foreclosures, a “sheriff’s sale” is customarily used as this last step in the foreclosure process. For nonjudicial foreclosures, the sale is often a “trustee’s sale.” You can usually learn when a sheriff's sale or trustee's sale will happen by checking:
If you're a homeowner facing foreclosure, you'll probably receive a notice that gives the foreclosure sale date.
The sale is typically an auction, open to the public. At the foreclosure sale, the property either reverts to the lender or is sold to a third-party bidder, with the proceeds going toward repaying the borrower's debt. In some states, the winning bidder takes ownership of the property subject to a redemption period, which means the foreclosed homeowner or a lienholder might be able to pay off the debt and get ownership of the property. Also, if the winning bid at the sale is less than the borrower's total debt, the lender might seek a deficiency judgment against the foreclosed homeowner, depending on the situation and state law.
As the name implies, local law enforcement usually conducts sheriff’s sales. Again, these sales are open to the public, and anyone may bid on the properties being sold. Sheriff’s sales generally happen at the sheriff’s office or the county courthouse, typically on the front steps. Now, though, more and more foreclosure auctions are being conducted online. One popular foreclosure auction site, Auction.com, even offers an app feature so bidders can bid from anywhere.
At the auction, the foreclosing lender submits the first bid, called a “credit bid.” With a credit bid, the lender gets a credit at the sale up to the full amount of the borrower's debt. The lender can choose to bid the full amount of the borrower’s debt at the sale, or it can decide to bid less. After the lender bids, another person or entity can bid higher. Often, the lender is the highest bidder at the sale because no one else bids on the property.
If a third party is the winning bidder, that person or entity will likely need to pay a percentage of the property’s price with a money order or certified check immediately after 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, like by the end of the following business day. If the winning bidder doesn’t pay the balance by the given deadline, the deposit might become non-refundable, and the property could be subject to another sale. Or the winning bidder might have to pay the full amount of the winning bid at the sale.
Mortgages and deeds of trust are both agreements in which a borrower puts up title to real estate as security (collateral) for a loan. While these documents are similar, they have one major difference: the parties involved. While a mortgage involves two parties, a borrower and a lender, a deed of trust usually has three parties: the borrower, the lender, and a trustee. Depending on state law, a trustee might be an individual, like an attorney, or a business entity, like a bank or a title company. Sometimes, state law limits who may act as a trustee in specific ways.
In states that use deeds of trust to create a property lien, the foreclosure is normally nonjudicial, and the trustee normally handles the process. Sometimes the lender designates a substitute trustee, a party other than the original trustee, to manage the foreclosure. The trustee, or the substitute trustee, prepares the foreclosure documents, files them in the land records, sends any required notices to the borrower, handles a reinstatement or pre-sale redemption (if applicable), and holds the sale, called a “trustee’s sale.”
A trustee’s sale is basically the same as a sheriff’s sale; it’s the last step in a nonjudicial foreclosure when a trustee handles the process. Like sheriff’s sales, trustee’s sales are open to the public, and anyone may bid on the properties being sold. Trustee’s sales also regularly happen at the county courthouse, typically on the courthouse steps, or online. The lender makes a credit bid and is frequently the highest bidder at the sale.
Notices of foreclosure sales are usually published in newspapers, typically four to six weeks in advance. Also, many counties have an online list of the properties that are going to be sold at a foreclosure sale. A copy of the list is sometimes posted in the courthouse or another county office.
Homeowners often receive notice of a sheriff’s or trustee’s sale in the foreclosure paperwork or through a mailed notice of sale.
Following the sale, a sheriff's deed or trustee's deed is generally issued, transferring the home’s ownership to the high bidder, and the deed is recorded in the land records. If the lender is the highest bidder at the sale, it gets ownership of the property, and the property then becomes what’s called “real estate owned” (REO). If a third party is the highest bidder, that person or entity gets ownership of the property. The buyer takes title to the home in as-is condition.
In some states, the winning bidder takes ownership of the property subject to a right of redemption. If state law provides a post-sale redemption period, the foreclosed homeowners or, in some cases, lienholders can redeem the home. Also, state law might give the foreclosed homeowners the right to live in the home during the redemption period, even if they don’t exercise their right to redeem the property. But if they don’t move out when their legal right to live in the home ends, the buyer from the foreclosure sale may start an eviction.
Also, when the winning bid at the sale is less than the borrower's total debt, the lender might be able to get a "deficiency judgment" (a personal judgment for the difference between the borrower's total debt and the sale price) against the foreclosed homeowner. Whether or not the lender can get a deficiency judgment depends on state law.
As with any legal situation, foreclosure laws have many nuances and complexities that vary from state to state. If you have further questions about the process, consider talking to a local foreclosure lawyer.
If you’re a homeowner facing foreclosure and want to learn about different loss mitigation options, like a modification or short sale, a HUD-approved housing counselor is an excellent resource who can help you at no cost.