What is a Foreclosure Auction?
The foreclosure auction process starts when a lender attempts to recover the loan balance from a borrower who has failed to make the monthly payments agreed to in the mortgage loan contract. During a foreclosure, the lien holder asks the court to force the sale of the property used as collateral for the loan. The right to file for foreclosure allows the lender to recoup the debt owed to them. A violation of the mortgage is the nonpayment of a promissory note secured by a lien on the property. In the context of residential mortgage loans, a bank forecloses by seizing the house after the owner fails to comply with the mortgage agreement. Foreclosures can also be initiated for failures to pay property taxes.
Court-ordered foreclosure sales are auctions of properties that are pledged as collateral for a loan or which are the subject of a lien. Usually, this happens when a judge determines that a borrower or property owner failed to meet the obligations in a contract relating to the property.
A foreclosure action usually starts due to a hardship, such as unemployment, divorce, death, or illness that prevents people from making payments. Debtors will sometimes initiate foreclosure intentionally by not making mortgage payments because their house is over-leveraged. When a property is over-leveraged, the owner owes more to the bank than the price the house can sell for on the open market. A short sale is a better alternative than foreclosure in this situation. Short sales are less damaging to the borrower's credit, and banks are usually motivated to approve short sales to avoid the excessive fees that go along with foreclosures. Borrowers in default should also explore forbearance and loan modification as alternatives to foreclosure. Forbearance and loan modification involves restructuring the mortgage loan to allow the borrower to get current on their monthly payments and avoid further damage to their credit.
The first step that leads to foreclosure is missed payments. When a borrower is three to six months late on their mortgage payments, the lender records a public notice at the County Recorder's Office indicating that the borrower has defaulted on their mortgage. This foreclosure notice is usually called a Notice of Default or Lis Pendens, depending on the state. Foreclosure proceedings are a matter of public record. Therefore, it might be required by state law that the lender post the notice on the property's front door. This official notice is intended to notify borrowers that they are in danger of losing all rights over the property and may be evicted.
After receiving a Notice of Default from the lender, the borrower enters into a grace period. This grace period is also known as pre-foreclosure. During this time, anywhere from 30 to 120 days, depending on local regulations, the borrower can explore alternatives to foreclosure such as loan modification, short sale, or deed in lieu. If the borrower pays off the outstanding debt in default during this time, the foreclosure process ends, and the regular mortgage payment will resume.
How Homes End Up At An Auction
If the outstanding debt is not paid by the deadline for foreclosure, the bank will set a date and time for the home to be sold at a foreclosure auction. The foreclosure sale is also known as a Notice of Trustee Sale. The Notice of Trustee Sale must be recorded with the county recorder's office. The debtor must receive notification of this sale, and there will also be public notice of the sale. The foreclosure sale public notice is usually posted in the local newspaper. The trustee auction is usually held on the steps of the county courthouse. A public auction can also be held at the property in foreclosure.
How Foreclosure Auctions Work
Bidding on foreclosed homes always carries potential risks. When you purchase foreclosure properties, you don't know the full extent of the property's condition. The property is sold to the highest bidder, and there are no expressed or written warranties as to the condition or presence of outstanding liens of the foreclosed house sold at auction. These auctions usually require the homes to be purchased with certified funds. Acceptable forms of payment include cash and cashier's check. A cashier's check is just as good as cash because the funds are immediately available. Almost every state requires you to pay the total amount immediately after the auction. These homes are usually purchased by real estate investors who have the funds needed to buy these houses without needing a mortgage. The bank will always bid the loan balance as the minimum bid at the auction. It is not uncommon for the minimum bid to be the mortgage balance owed to the lender. If no other buyers are willing to bid a higher sale price, the certificate of title will revert to the mortgage company. Any surplus funds resulting from the foreclosed home sale will be distributed to junior lien holders that filed a claim.