No one wants to find themselves losing their home to foreclosure, but if you’re in this situation, there’s potentially still time to recover using the right of redemption.
What is right of redemption?
Right of redemption is a legal process that gives homeowners who have fallen behind on their mortgage payments the opportunity to keep their home by paying the money they owe, plus interest and fees.
Depending on where you live, the right of redemption might apply up until the foreclosure proceedings, or even after the foreclosure sale, up to a certain period of time.
Mortgage lenders use the home you buy as collateral or security for your mortgage. If you fail to make payments on the loan, your lender can foreclose and sell your home to recoup the money it lent you. If, during a set redemption period, you can pay your mortgage balance, plus certain fees, in full to the lender, you can reclaim your home.
In some states, you can even exercise this right after the foreclosed home is sold to another party by paying that party the amount they paid, plus certain expenses. This is known as the statutory right of redemption because it stems from various state statutes related to homeownership.
How to exercise right of redemption
When you fail to make payments on your mortgage, your lender can begin the foreclosure process. Typically, it starts by sending the borrower a notice of default to alert them of the missed payments and the amount owed. This notice usually gives the borrower a period of time to make up the missed payments, plus late fees, to avoid foreclosure. At this time, borrowers can also choose to fight the foreclosure if they believe the lender doesn’t have the right to foreclose.
After the period outlined in the notice of default, the lender can foreclose on the home and put it up for sale.
To exercise the right of redemption, the borrower can write to their lender or servicer, or to the party that purchased the home, and request a statement of charges related to the home. This statement should outline the foreclosure price of the home plus any related fees. If the borrower is able to pay this amount, in full, they’ll get to keep the home.
The amount of time that borrowers have to exercise this right varies by state. For example, in Alabama, borrowers have the right for up to one year after foreclosure, while Illinois gives borrowers just 30 days after the sale.
Investors who buy foreclosed homes have to be prepared for the previous owners to exercise this right. If you’re an investor, you might want to reduce the price you’re willing to pay for a foreclosed home and make plans for how to handle a redemption in case it happens.
Does right of redemption work?
In states where the statutory right exists, borrowers can, and do, buy their homes back after they’re foreclosed. In every state, a borrower can exercise the right of redemption ahead of the foreclosure proceedings.
The reality, however, is that the right of redemption is rarely exercised. That’s because if a homeowner is having trouble making mortgage payments, it’s unlikely they’ll be able to come up with the full amount they owe, which can be many times more than the monthly payment. While you might think you can simply get a new mortgage in order to come up with the funds, missed mortgage payments and foreclosure tank your credit score. This makes it almost impossible to obtain a new loan.
Other ways to avoid foreclosure
If you’re falling behind on mortgage payments (or your home is already in foreclosure) and you can’t repay what you owe, you could have other options.
If you haven’t already, reach out to your lender or servicer. Many are willing to work with proactive borrowers to help adjust your repayment schedule or put your loan into forbearance. At worst, your lender won’t be willing to work with you, so there’s little harm in asking for help.
You could also consider refinancing your mortgage. If you’ve built equity in your home, refinancing can help you lower your monthly payment or get cash. You can use that money to get the rest of your finances in order so you can handle your mortgage payments more easily. If you don’t have much home equity, there are refinance options for underwater homeowners, as well.
If you’re in dire straits, you might consider selling your home. This’ll allow you to pay off your mortgage and get whatever additional equity out of the home. You’ll also avoid foreclosure, which means you won’t damage your credit, and you’ll have a clean slate as you search for a new home.
Lastly, look into housing counseling programs. A U.S. Department of Housing and Urban Development (HUD) counselor can help you interact with your servicer, get a loan modification or explore other relief options.