What Is Right of Redemption?

Right of redemption is the legal right of a mortgagor or borrower who owns real estate to reclaim his or her property once certain terms have been met. The right of redemption gives property owners who pay off their back taxes or liens on their property the ability to prevent foreclosure or the auctioning off of their property, sometimes even after an auction or sale has occurred. The amount paid generally must also include the costs incurred in the foreclosure process, plus the entire amount of the mortgage if the payoff comes after foreclosure or auction.

Understanding Right of Redemption

The term right of redemption can also be used in another sense. Debtors have the right to pay their creditors an amount equal to the fair market value of the assets securing the lien. By doing so, they can reclaim their personal property.

Foreclosure occurs because when a person obtains a mortgage to buy a home, the home itself serves as the collateral for the loan. Since the home acts as collateral, the home owner agrees that they will forfeit ownership of the home in the event that they default on their payments. When a home is foreclosed upon, the lender will generally sell the property in order to recoup money lost on the loan.

In opposition to right of redemption, many mortgage notes include the right of foreclosure describes a lender's ability to take possession of a property through a legal process called foreclosure. Lenders may invoke their right to foreclosure when a homeowner defaults on their mortgage payments. The mortgage’s terms will outline the conditions under which the lender has the right to foreclose. State and national laws also regulate the right of foreclosure. The right of foreclosure does not give lenders the right to take possession of a home without notice. 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.

Key Takeaways

  • 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.
  • This right may be executed, even if the home has been re-sold by the lender, as long as it occurs during the redemption period time frame and all conditions have been 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.

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. The right of redemption can be exercised after a foreclosure sale in about half of all states. This is called statutory right of redemption and the repayment rules may differ from paying off all the outstanding debt that existed before the sale.

Despite the possibility to take action before a foreclosure sale, in common practice, borrowers tend to only exercise a right of redemption after a foreclosure if they have the means to try 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 lapse into default.

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, they 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. Depending on the laws of each state, a statutory right of redemption could still call for the full repayment of debt rather than the foreclosure sale price.