Judicial Foreclosure
Judicial Foreclosure is the most common form of foreclosure, and is often simply referred to as "foreclosure".
When a borrower fails to make a payment on a loan, they are "in default". The lender will issue a Notice Of Default (NOD), which is a formal notice that a default has occurred and legal action may be taken if it is not immediately rectified.
If the borrower fails to make arrangements with the lender to repay the default amount, the matter will likely end up in court.
If the court finds against the borrower, they will order the sale of the property to repay the debt. Because the sale is court-ordered, it is referred to as Judicial Foreclosure.
The actual sale of the property is generally handled by the county sheriff or another officer of the court. The sale will usually be done by auction so that the money can be recovered quickly and the matter closed.
The money raised from the sale is used to pay for the costs of the sale (e.g. advertising, auctioneer's fees, etc) and the legal fees of the lender. The lender and other creditors with a claim on the property are then paid what they are owed.
Any funds left over after discharging the debts are then returned to the borrower. Judicial foreclosure is seen as a fair process for this reason, as the borrower receives the equity they had built up in the property through principal repayments and capital gains. Compare this with Deed In Lieu of Foreclosure, where the lender is simply given the deed to the property in settlement of the debt and the borrower is left with nothing!
It is fairly common for lenders to bid at the auction for the amount they are owed. If nobody else bids, the lender then becomes the owner of the property (which is often then resold as a Bank-Owned (REO) property for a profit). If another bidder joins the auction the lender is at least assured of recovering their full entitlement, since that amount was the opening bid.
If the lender bids significantly less than the amount they are owed and wins the auction, the court can refuse to ratify the final sale price. This helps to prevent lenders profiteering with strategic foreclosures, where they end up owning the property outright and also being awarded a deficiency judgement against the borrower for the difference between the sale price and the debt.
Read about other types of foreclosure.