What happens when final bid doesn't cover debt 100%?

Question

We are still studying the foreclosure auction process, but haven't found any complete free education source for all our questions. Clearly we are starting from a very basic level of knowledge!
We assume a reserve price need not necessarily be for the full debt to a first mortgage lender. But what happens if the winning bid is above the reserve but doesn't cover all the lender's valid costs, does that get added to the costs the lender will try to recoup from selling as REO?

Answer 1

It looks like you have already got very concise answers from some experts. I'll add my two bit worth.
Say the first mortgage holder foreclosed when the amount in default was $100k. The final bid at auction was $90k. Then the court order authorising the mortgage holder to collect $10k is called a deficiency judgment. Its a personal debt of the former home owner and not attached to the property.
Two more points.
If a court can be persuaded that a lender bid (ie when the lender has someone bid on their behalf when the other bids are too low) is less than a good faith estimate of value at a public auction then a deficiency judgement can be avoided.
Some states do not allow deficiency judgements, and in some the DF's are limited to the amount by which the debt exceeded FMV.

Answer 2

Do not be surprised if the lender has an agent at the auction bidding to insure that they get what they want. In my area, it's useless to go to a sheriff's sale for a foreclosure unless the lender is owed less than the house will sell for. Generally speaking, the lender will 'buy' it at the foreclosure sale and take possession unless they can determine that the bids come close enough to what they want out of it.

Answer 3

i don't know, but try researching a "short sale"

I think this is the term for when a home is sold for less than what is owed, I believe the remainder of the debt remains on the previous owner and they work out a deal with their lender to pay it back. I believe you need approval from your lender to do a short sale since they will have a loan out to you but no longer have the house as collateral.

I'm not an expert though so make sure you research this well.
.

Answer 4

When there is a foreclosure, the bank is trying to get rid of the property at the least possible loss and future expense. They have already booked a loss on that paper when it forclosed. They aren't looking for a gain. They have a set reserve so they won't completely get hosed and they rely on a broker to advise them on that number. That number has no relationship to the amount of debt that became attached to that property. The reserve sets the "tone" of their expectations.

Answer 5

the original debtor is responsible for the entire debt including any legal fees associated with the foreclosure. If the full debt is not settled but the auction then the difference is still owed. Conversely if the sale price is over what it owed the debtor is entitled to the overage.

Answer 6

It means you are 'upside down' the loan. Mostly auto loans are this way but some mortgages can be if you try and sell fairly quickly after buying.

You will owe the difference on the loan.

Answer 7

State specific to some extent; but correct. Deficency balance is usually still the responsibility of the original owner and remains his debit until satisfied.