A mortgage is secured by the collateral of a residence. When a homeowner breeches his contract by not making regular monthly payments on his mortgage the bank has the option of repossessing the property, more commonly referred to as foreclosing. Once a bank takes the action to foreclose on a property there are also steps taken against the buyer designed to transfer possession and assist the bank on collecting the bad debt.

Judical vs. Non-Judical

What happens to the buyer post foreclosure largely depends on whether or not the state allows a judicial or non-judicial process.

A judicial foreclosure allows the buyer to present her case in front of a judge prior to the lender being issued a court approval to foreclose. If the courts rule in favor of the lender, the foreclosure process moves forward. Conversely, if the courts find in favor of the buyer, a repayment plan can be established with the lender to bring the mortgage out of default.

In a non-judicial foreclosure the bank does not have to deal with any red tape from the court system to foreclose. When a lender chooses to proceed with a foreclosure the buyer receives a foreclosure notice via certified mail that informs them of the auction date.

The Foreclosure Auction

Once a foreclosure notice has been presented to the buyer via certified mail or via a court appointed process server, the foreclosure date is set and the auction is initiated.

The home is then auctioned off to the highest bidder. During the auction anyone is free to bid on the property, to include the original buyer. Should no bidder provide a proposed price that meets the minimum price the bank is willing to accept, the bank retains ownership of the property. Once the auction has been concluded ownership rights are transferred and either the new owner or the bank takes possession.

The Foreclosure Auction

In states such as California and Florida the foreclosure process is a judicial one. A judicial foreclosure allows the buyer a day in court prior to foreclosure proceedings taking place. Should the courts decide that the foreclosure is imminent and favors the lender in the decision to foreclose that does not shut the door on the buyer redeeming in the property.

In California, for instance, the buyer has an entire year to come up with the defaulted amount and can reinstate the loan and resume the right of ownership. In Florida the right of redemption only lasts for six months. However the right of redemption is very rare as most states have a non-judical foreclosure process, meaning that the lender does not have to be issued a court order to foreclose and can foreclose using a trustee and notices delivered to the buyer via certified mail.

Property Evaluation

In states like Texas and Nevada, when the bank retains ownership to a property they will hire a real estate brokerage to evaluate property condition and discover if anyone is inhabiting the property. If the broker determines that the property is still inhabited by the buyer or any resident, the bank will proceed with an eviction.

The eviction process takes approximately three weeks to complete and part of the eviction means that the lender does have to get a court issued eviction order. Once the court issues the notice of eviction, the notice is served by the county sheriff’s department in the county where the property is located. The eviction notice gives the resident 72 hours to vacate. Should the resident fail to adhere to this notice, the sheriff’s department can enter the property in order remove the resident and all personal belongings by any means allowed by law.

After The Sale

Whether the property is sold at auction or retained by the bank post foreclosure to resell the lender can still take legal action against the buyer.

A judgment is a court order to pay a bad debt. The bad debt for a house is determined by the difference between what a property sells for versus what the buyer owes on the mortgage.

For example, if a buyer owed $300,000 for a property that sold at auction or post foreclosure for $225,000, a $75,000 judgment can be issued against the buyer. A judgment will remain on a buyer’s credit report and record for 10 years, and can hinder future purchases and credit approvals.