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In a NutshellAs a homeowner, you might be surprised to learn that at the foreclosure sale, your own mortgage lender can place a bid (called a credit bid) on your home. Read more to learn about why mortgage lenders do this and what happens at a foreclosure sale.
What happens after your mortgage company decides to foreclose on your home? Well, what the foreclosure process looks like depends on what state you live in, but the end result is always the same if the affected homeowner doesn’t work out an alternative arrangement with their lender: a foreclosure sale. At foreclosure sales, foreclosed homes are auctioned off to the highest bidder.
As a homeowner, you might be surprised to learn that at the foreclosure sale, your own mortgage lender can place a bid (called a credit bid) on your home. Below, we’ll cover why mortgage lenders do this and how it can impact you financially. To understand credit bids, it’s important to know a little bit about how the foreclosure process works…
A mortgage lender will start the foreclosure process if a homeowner defaults on their loan. Under federal law and in most states, default happens when a homeowner hasn’t made their required monthly payments on their mortgage for at least 120 days.
A mortgage lender, sometimes called a secured creditor or secured lender, can start this process because mortgage loans are secured by the house. By securing the mortgage loan with the house, homeowners are giving lenders what's called a security interest in the home, hence the name secured lender.
In the case of a mortgage, a lender's security interest in the home means they can take the home back if the borrower doesn't make the required mortgage payments. In this way, mortgage lenders become the secured lender (or again, secured creditors) of the loan because they lent the money using a loan secured by the home. Secured creditors have what's called a secured creditor's right to the home. That’s what gives them the ability to foreclose on the home.
Generally speaking, the foreclosure process can proceed one of two ways depending on the state the borrower lives in: either through a judicial foreclosure or a non-judicial foreclosure. Some states only allow judicial foreclosures, but most allow both.
In a judicial foreclosure process, lenders have to go to court and get a judge's approval before they can foreclose on the home. This means that the lender has to file a lawsuit against you and notify you of that lawsuit so you have a chance to respond before it can proceed with a foreclosure sale.
States that allow judicial foreclosures only (and do not permit non-judicial foreclosures) include Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, South Carolina, Vermont, and Wisconsin.
Judicial foreclosure is sometimes used in the District of Columbia and Nebraska, and homeowners can request a judicial foreclosure in Oklahoma and South Dakota. Note that judicial foreclosures are sometimes required in states that allow for non-judicial foreclosures as well, usually depending on the terms laid out in a specific mortgage.
Non-judicial closures are different because the lender doesn’t have to go to court to complete the foreclosure process. Generally, in non-judicial foreclosure states, lenders have to mail a notice of default to the homeowner. This notice gives homeowners an opportunity to dispute the default.
Then, the lender will need to accelerate the loan as outlined in the acceleration clause in the mortgage loan agreement. The acceleration clause allows the creditor to demand the full amount left to pay on the mortgage immediately. Once they’ve accelerated the loan, they need to file a foreclosure notice in the land records office, which is usually called the register of deeds.
Once the lender has filed the foreclosure notice with the register of deeds, they can start the sale process. In any foreclosure, lenders need to post a notice of the foreclosure sale on the property and advertise the date and time of the sale in the legal notices section of a newspaper. How long the notice must be posted depends on state law.
At least one state (Alabama) allows the notice to state the sale hours as “the legal hours of sale,” which could be any time between 10 a.m. and 4 p.m. Rules like this are rare because they make it difficult for bidders to know when to show up and generally discourage competitive bidding.