A foreclosure sale is the final stage of a foreclosure legal process. After the lender (usually a bank) carries out the foreclosure legal process, the mortgaged property is sold at auction or transferred back to the lender. The purpose of a foreclosure sale is that the lender recovers all or part of the money on a defaulted loan.
There are three types of foreclosure legal processes. The first is judicial foreclosure, which is used in many states. This process involves the lender filing a lawsuit against the borrower, resulting in a judicial order for the sheriff to conduct the sale of the property at auction. The second is the power of sale, which is allowed in many states and used if the mortgage has a power of sale clause. In this non-judicial process, the mortgage company conducts the sale at auction without the involvement of the courts. The third is strict foreclosure, which is only permitted in a few states. This also is a judicial foreclosure, with the difference that the court will order that the ownership of the property is transferred back to the lender, instead of being sold at auction. Each type of foreclosure process has its own steps, which vary according to each state’s regulations.
For reference purposes, a judicial foreclosure commonly has the following stages:
- Default starts when the borrower does not make one of the monthly loan payments. After the borrower misses one payment, the lender usually sends a missed payment notice indicating that the payment is due. The borrower may also contact the lender by telephone to inform about the missed payment. After the borrower misses two or more payments, the lender may send a demand letter requiring the payment of the missed monthly payments. Again, the lender may also do this by telephone. Many mortgages require the lender to send a breach letter before starting the foreclosure of the property. This letter will indicate the borrower is in default on the loan, giving a period to cure the default (usually 30 days). The lender may also propose to the borrower new payment conditions for the loan.
- If the borrower does not cure the default, the lender will move forward with the foreclosure of the property. This generally occurs after 120 days of missed payments. The lender will file a lawsuit against the borrower in state court. The court will serve the borrower to inform about the complaint for foreclosure. Afterward, the borrower will have around 20 to 30 days to respond to the complaint.
- If the borrower does not respond to the complaint, the judge will automatically issue a judgment authorizing the sale of the property at auction. If the borrower does, the case may eventually go to trial. In any case, the most likely result is that the court will enter a judgment for foreclosure thus authorizing the sale of the property at auction.
- The foreclosure sale, which is usually made by the county sheriff, implies that the property is sold at auction to the highest bidder. Some states grant a redemption period between the judgment for foreclosure and the confirmation of the sale. During the redemption period, the borrower may bring the defaulted loan current in one payment, by paying the missed payments, plus all applicable interests and additional legal fees. This will end the foreclosure process and allow the borrower to stay in the property.
- When the foreclosure sale is confirmed, if the borrower does not voluntarily leave the premises, the borrower will likely receive an eviction notice requiring it to vacate the premises of the property immediately.
A foreclosure sale will appear as a negative event in the borrower’s credit report and will remain for seven years counted from the date the borrower missed the first payment on the loan. After that, it will be deleted from the borrower’s credit report.
[Last updated in July of 2021 by the Wex Definitions Team]