Every state allows struggling homeowners to buy back their properties before the homes are lost to foreclosure sales. In about half the states, even foreclosure isn’t the final word: Defaulting borrowers may have one last chance to get back their homes.
How it’s done
The little-known — and little-used — process is called redemption. The rules vary widely by state, but people who can come up with a sufficient lump sum may be allowed to repurchase their homes from whoever bought them at the foreclosure sale.
The homeowner must repay the full amount the buyer paid, plus certain other fees, says attorney Amy Loftsgordon, contributing editor for self-help publisher Nolo. The deadline for such redemptions varies from 60 days after the sale to as long as a year.
Redemption puts owners in limbo
That can create more than a little uncertainty for people who buy homes in foreclosure sales, Loftsgordon notes.
“In Alabama, you’re sitting on pins and needles for a year wondering, ‘Is the owner going to come back?'” Loftsgordon says. “Is it likely? No. Is it possible? Sure.”
Redeemers need cash
The big problem is that homeowners have to come up with all that cash. Another loan to buy back the home typically isn’t an option, since the borrower’s struggles have trashed his or her credit scores and few lenders will take the risk.
“There are very, very rare situations where that will occur, where a small lender will work with you,” says Loftsgordon, who previously worked at one of the nation’s largest foreclosure law firms. Bigger lenders, however, “are not going to cut anybody a deal.”
Occasionally, people who have lost their homes to foreclosure manage to scrape up sufficient funds, thanks to a windfall or loans from family or friends, Loftsgordon says. Even then, the former homeowner may be stymied by often-complicated rules.
Now for the fine print
In California, for example, only judicial foreclosures — ones where the lender files a lawsuit — offer a right of redemption. But the vast majority of foreclosures in that state are nonjudicial, meaning there was no court supervision. Even in judicial foreclosures, the borrower doesn’t have a right of redemption if the sale proceeds didn’t cover the loan amount but the lender opted not to pursue a deficiency judgment, or, in California, where the law prohibits such judgments in the homeowner’s situation. (Deficiency judgments are prohibited if the loan was used to buy an owner-occupied home, for example.)
Other states, such as Ohio, have such complicated rules for redemption that an attorney’s help is often necessary, Loftsgordon says.
Learning the rules
Clearly, preventing foreclosure — such as through loan modifications or short sales — is often the better and cheaper route for homeowners. But for those who may be able to take advantage of one last chance, the right of redemption might be worth a try.