What Is Right of Redemption?
The right of redemption allows individuals who have defaulted on their mortgages the ability to reclaim their property by paying the amount due (plus interest and penalties) before the foreclosure process begins, or, in some states, even after a foreclosure sale (for the foreclosure price, plus interest and penalties).
- Right of redemption is a legal process that allows a delinquent mortgage borrower to reclaim their home or other property subject to foreclosure if they are able to repay their obligations in time.
- In some states, this right can be exercised even if the lender has already re-sold the property, as long as it is still within the redemption time frame and all conditions are met.
- A successful redemption will also typically require the borrower to repay any costs incurred to the lender or other parties as a result of the foreclosure process.
Understanding Right of Redemption
When an individual obtains a mortgage to buy a home, the home itself serves as the collateral for the loan. That means that the home owner forfeits ownership of the home if they default on their payments. Many mortgage notes include the right of foreclosure, which describes a lender's ability to take possession of a property through a legal process called foreclosure and outlines the conditions under which the lender has the right to foreclose. (State and national laws also regulate the right of foreclosure.)
When homeowners default on their mortgage payments, lenders may invoke their right to foreclosure. Lenders must abide by specific procedures in order for a foreclosure to be legal. First, they must provide a default notice to the borrower, alerting them to the fact that their loan is in default from missed payments. The homeowner then generally has a specified amount of time to make good on any missed payments and avoid foreclosure. They will likely also be required to pay late payment fees in addition to any outstanding balance. They may also use this time to fight the foreclosure if they believe that the lender does not actually have the right to foreclose on the property.
If a home eventually is foreclosed upon, the lender will generally sell the property in order to recoup money lost on the loan. The right of redemption gives mortgagors the opportunity to reclaim their property and stop a foreclosure sale from happening, or, in some cases, even repurchase their property after a sale has occurred.
The ability to exercise a right of redemption, as well as how long the redemption period is, varies from state to state.
How Right of Redemption Can Be Exercised
A right of redemption may be exercised during a time frame called the redemption period, which may be before or sometimes after a foreclosure auction has concluded. Every state allows borrowers to exercise their rights of redemption prior to the closure of foreclosure proceedings. Many states also allow the right of redemption to be exercised after a foreclosure sale, which is called statutory right of redemption. In this case, the repayment rules may differ from paying off all the outstanding debt that existed before the sale and may just require paying the foreclosure price plus other fees and penalties.
Despite the opportunity to exercise the right of redemption before a foreclosure sale, borrowers tend to only exercise a right of redemption after a foreclosure if they do at all. This is because borrowers who already have enough funds to cover the costs of paying off the entire outstanding debt plus other fees are unlikely to have lapsed into default in the first place.
How Right of Redemption Helps Borrowers
Theoretically, the right of redemption can help mortgagors stay in their homes. In reality, though, the right of redemption is not regularly practiced, because most borrowers in default don't have the ability to come up with the large sums of cash needed to exercise the right.
However, it is possible for the borrower to turn a profit in certain circumstances when they exercise a right of redemption after a foreclosure sale. A property might sell below its market value in a foreclosure auction. If the borrower’s state allows the right of redemption to be exercised after such a sale, the borrower could potentially take back ownership. The borrower would pay back the foreclosure sale price plus additional fees, which might be lower than the debt owed on the mortgage. They could then resell the home at or above market value and keep the difference as profit. This wouldn't work in every state; in some circumstances a statutory right of redemption could still call for the full repayment of debt rather than the foreclosure sale price.