How do foreclosures work

At the auction, the foreclosing lender submits the first bid, called a " credit bid. 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. 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. This process, called a judicial foreclosure, usually takes at least several months, and as long a few years in some places. In a nonjudicial foreclosure, the bank usually has to provide notice about the foreclosure in one or more of the following ways:.

Typically, the bank also has to record a notice in the county records. Nonjudicial foreclosures generally take much less time than judicial ones, taking only a few weeks or months to complete. If you have one or more defenses and want to fight a nonjudicial foreclosure, you have to file a lawsuit.

With both judicial and nonjudicial foreclosures, the process ends with a foreclosure sale. The sale is typically an auction where the public and foreclosing bank may bid on the property.

The bank normally makes a bid on the property using what's called a "credit bid" rather than bidding cash. The bank gets a credit up to the amount of the borrower's debt. The highest bidder at the sale becomes the new owner of the property. In two states— Connecticut and Vermont—the bank can use what's called a "strict foreclosure" process.

In a strict foreclosure, the bank files a lawsuit, but the court doesn't order a foreclosure sale. Instead, the court directly transfers the property title to the bank. Depending on state law, you might be able to remain in the property—even after the sale—until the redemption period expires or some other action, like sale ratification, happens.

If you don't move after the foreclosure sale occurs or the extra time expires, though, you'll be evicted. In some cases, the lender includes an eviction as part of a judicial foreclosure. Other times, the lender has to file an eviction lawsuit to evict.

A separate eviction lawsuit is typically required after a nonjudicial foreclosure. If the foreclosure sale doesn't bring in enough money to fully repay what you owe the bank, the difference between the sale price and the total debt is called a "deficiency.

Other states prohibit deficiency judgments under certain circumstances. While this article provides a general picture of foreclosure processes, laws differ among states.

To get specific information about your state's foreclosure procedures, how they apply to your particular situation, and your legal rights , consider talking to a local foreclosure lawyer. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site.

The attorney listings on this site are paid attorney advertising. In some states, the information on this website may be considered a lawyer referral service. Please reference the Terms of Use and the Supplemental Terms for specific information related to your state. Lawyer Directory. Call us at 1 How Does Foreclosure Work?

Make sure anyone you talk to is calling from a number you can verify. To find a legitimate housing counselor, you can visit the U.

A foreclosure is a severely negative credit event, knocking off points or more from your credit score, according to FICO.

Additionally, it stays on your credit report for seven years. The missed payments prior to the foreclosure will also have a damaging effect on your credit.

Because missed payments top the list of negative events, your credit score will suffer before the foreclosure process even begins.

Natalie Campisi is a Los Angeles-based reporter who covers mortgages and housing news for Forbes Advisor. Previously, she was the senior mortgage reporter and analyst for Bankrate. Select Region. United States. United Kingdom. Natalie Campisi. Forbes Advisor Staff. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations. What Is Foreclosure? In a judicial foreclosure, the lender files a lawsuit to initiate a foreclosure.

The borrower goes to court to fight the lawsuit; if they lose the house will go into foreclosure and can be sold at auction. Non-judicial foreclosures rely on power-of-sale clauses in the mortgage or deeds of trust to recoup the balance owed if the borrowers stop making payments. There is no court hearing, and the process generally is faster than under a judicial foreclosure.

The mortgage clause authorizes trustees who are appointed by the lender to sell the home to pay off the balance. The lender is obliged to follow out-of-court steps laid out by the state and the mortgage agreement to begin the foreclosure process. When Does Foreclosure Begin? Foreclosure Timeline In both judicial and non-judicial states, the initial process is typically the same, beginning with your first late monthly mortgage payment.

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