What Is a Zombie Foreclosure?
A zombie foreclosure occurs when a home is left vacant by homeowners who have defaulted on their mortgage and either incorrectly believe they have to immediately move out after receiving a foreclosure notice, or simply choose to abandon the property for other reasons. More commonly, it's the former scenario where the owner mistakenly believes that the foreclosing lender is now responsible for the property, even though the homeowners still hold title to the property.
Say the lender doesn't complete the foreclosure process and sell the home. Then the property remains unoccupied and uncared for. As a result, it often falls into disrepair, creating safety concerns and resulting in an appearance that may lower property values in the surrounding community.
- Zombie foreclosure is the abandonment of a property by homeowners who have defaulted on their mortgage, received a foreclosure notice, and mistakenly believe that the lender is in charge of the property.
- Until the foreclosure process has been completed, a homeowner continues to hold title to the property and is responsible for its upkeep.
- A zombie foreclosure can create problems for an entire neighborhood because a vacant, unattended house can lower property values.
How a Zombie Foreclosure Works
Zombie foreclosure results from a homeowner's misunderstanding of the foreclosure process. During a normal foreclosure, the homeowners receive notice from the institution holding the defaulted mortgage that the house is entering foreclosure.
After this notice is issued, there is a mandated waiting period during which the homeowners can pull the house out of foreclosure by paying a large lump sum of money. The required payment may range from a few back payments to the total amount the homeowners owe in arrears or the full balance of the mortgage.
If the homeowners do not pay the lump sum, the process continues and a court will rule that the house belongs to the lender. It is only after this point, when the house legally becomes the property of the lender, that the homeowners are required to vacate the property. Until a foreclosure goes through, the homeowner continues to hold the title to the property.
In the fourth quarter of 2020, zombie foreclosures rose to 3.8% of all foreclosures, but overall, they have fallen by more than half since 2016, according to ATTOM Data Solutions.
Sometimes, a lender will decide not to complete a foreclosure—one reason might be that it's too expensive to pay for repairs and back property taxes that are owed on the property. The lender won't take title to the house but is under no obligation to notify the homeowner of this. In this circumstance—when the title of a home in zombie foreclosure remains in the name of the original homeowner (who is often unaware that the foreclosure wasn't completed)—it is known as a zombie title.
How Zombie Foreclosures Impact Homeowners
Zombie foreclosure escalates a bad situation—default on a mortgage—and makes it a problem for the entire neighborhood, not just the homeowner. A homeowner who leaves a property upon receiving a notice of foreclosure is abandoning the property without understanding the legal and financial ramifications of the notice or their actions. The owner of a zombie foreclosure is likely still responsible for maintenance, upkeep, homeowners association (HOA) fees, and property taxes. These requirements do not end just because someone has abandoned their home. Eventually, local authorities could attempt to recover unpaid property taxes or fees, or charge the owner expenses for maintenance.
To protect against the impact of a home falling into zombie foreclosure, homeowners who have defaulted on their mortgage and are facing foreclosure should stay in the residence until an official notice to vacate arrives. Afterward, they should follow up to be sure that the title of the property is no longer in their name.