Understanding The Right Of Redemption In Real Estate

If you fail to make your mortgage payments on time, your lender could take possession of your home through the foreclosure process. But there is a legal tool that homeowners can rely on to save their homes even after a foreclosure action is completed: The right of redemption.

The right of redemption allows homeowners to keep their homes if they pay back what they owe even after their lender starts the foreclosure process or puts the home up for sale at public auction. In some states, the right of redemption allows delinquent homeowners to pay what they owe and get their residences back even if their lenders have already sold the home to another buyer.

How can the right of redemption help you if you’re struggling with your mortgage payments? Here’s a look at how this legal process works.

When you get a loan to finance the purchase of a home, you'll sign some key papers. One document is a promissory note. This spells out how you'll repay your mortgage, usually in regular monthly payments.

You'll also sign a document called either a mortgage, deed of trust or a security instrument depending on the state in which the home sits. This document states what happens if you don't make your mortgage payments and states that lenders have the right to foreclose on your home if you default on your loan.

Foreclosure is how lenders, if they are the top bidders, take ownership of homes when their owners stop making mortgage payments. Some lenders will send homeowners a notice of default if they miss 90 days of mortgage payments, while others might send notice earlier. On day 121, lenders are typically allowed to begin foreclosure procedures.

During the 90-day period before lenders offer up a home at auction, the owners of the property can reclaim their home through a reinstatement. If the owners repay their debts, plus any additional fees or interest payments charged by their lenders, they can reclaim possession of their home and their lender won’t sell the property at auction.

The challenge here is that most homeowners can’t come up with the cash to pay back what they owe before their homes hit a public auction. Owners who fall behind on their mortgage payments are usually facing financial struggles. Those same struggles mean that they often can’t afford to exercise the right of redemption to save their home from foreclosure.

All states allow homeowners to pay back their debts and reclaim their homes before their residences reach the public auction stage of foreclosure. But some even let owners pay back their debts and reclaim their homes after these properties have been sold to another buyer or if the mortgage company was the highest bidder for the property, in which case the lender will attempt to sell the property. This is known as the statutory right of redemption.

How long owners have to repay their debts during the statutory right of redemption varies by state, but it’s not uncommon for states to allow owners to make these repayments up to 7 months after the home has been sold. If owners do this, they can reclaim their homes. Their lender will repay what the new buyers paid for the property at public auction or in a direct sale.

The right of redemption can help struggling borrowers retain their homes after a home has been foreclosed on. But there are challenges: Most notably, states differ on the redemption power they give to borrowers.

Only certain jurisdictions offer statutory right of redemption, when owners can reclaim their homes after they have sold to another buyer. The redemption period, the time during which borrowers can pay back what they owe and reclaim their homes, also varies by state, with some states being more generous than others.

Before seeking this legal protection, then, borrowers must research the right of redemption laws in their state. They can do this by visiting the United States Foreclosure Law website.

The right of redemption is a safety net for homeowners in danger of losing their residences to foreclosure.

But this right doesn’t come cheap. Not only must the mortgagor – the borrower who took out the mortgage loan and is in danger of losing a home – pay back what they owe on the mortgage, this borrower must also pay any additional fees charged by their lenders and any costs the servicer of the loan incurs during the course of servicing the loan.

But when borrowers do pay back what they owe and do this within the right of redemption period, they can save their homes from foreclosure.

Relatively few homeowners prevent a foreclosure during the right of redemption. That’s because many homeowners can’t afford to pay back what they owe. If they had extra funds, they would not have missed their mortgage payments and fallen into default.

There are other options, though, for homeowners who are struggling to make their mortgage payments that they can try to avoid falling into default on their loans in the first place. Then they would not have to worry about the right of redemption rules in their states. They could apply for a loan modification to help overcome their financial challenges. Lenders aren’t required to modify loans, but some will do this to avoid the time-consuming and often costly foreclosure process.

If you are a client of Rocket Mortgage^®, you can turn to our in-house loss mitigation team that can help you avoid defaulting on your loan. If you are not a client of ours, you might also work with a housing counseling agency that might help negotiate loan modifications on their behalf. Borrowers should work only with non-profit housing counselors. A good place to look for reputable counselors is through the U.S. Department of Housing and Urban Development.

The right of redemption could make it more difficult for investors who want to purchase foreclosed homes. Say you’re a real estate investor who finds a home for sale at a good price at a public auction. Or maybe you purchase a foreclosed home directly from a lender. If the home’s previous owners can now repay what they owe, and the statutory right of redemption period hasn’t expired, these former owners can reclaim their home, even if you’ve already purchased it.

It’s true that the lender from which you purchased the home will repay your investment. But this still represents a loss of time and a loss in potential future profits from your purchase.

The good news for investors is that it’s rare for former owners to use the right of redemption period to reclaim their homes. In most cases, these former owners do not have the financial means to repay their missed payments and any additional fees their lenders might charge.

The right of redemption is a way for owners to retain their homes even if they’ve missed payments and fallen into default on their mortgages. The challenge is that if you’ve already fallen behind in your mortgage payments, you might not have the funds necessary to take advantage of this legal right.

Are you struggling to make your mortgage payments? Learn more about what kind of mortgage help is available to you as a homeowner.