What is a credit bid?

When banks make loans that are secured by property sometimes the loans default and the bank needs to sell that property to pay down the loan.  When the property is real estate those sales are typically by public auction, whether by a private auctioneer or the sheriff.  Buyers who are interested in obtaining properties at a bargain frequently visit these foreclosure auctions and need to show the auctioneer or the sheriff that they have substantial cash for making a down payment.  After the sale, if they bid and win, these buyers will need to pay cash to complete the sale.  However, frequently a buyer will not be willing to pay enough money at the foreclosure auction to satisfy the outstanding loan to the bank.  When that happens the bank will prevail at the auction by bidding in the amount that is owed and that is secured by the property.  Bidding the amount owed by the bank is the same as bidding in cash by an outside buyer.  This is known as a credit bid.  The bank will be able to own the property outright by bidding in the amount that it is owed and paying cash only to the extent of foreclosure costs.

Foreclosure doesn’t have to be the end result of default. Read about how some people use forbearance agreements to stop a foreclosure sale. Forbearance helps both debtors and creditors find a better solution to the problem.

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