As a borrower or mortgagor, once you've fallen behind on mortgage payments, in either a residential or commercial situation, the loan goes into default, and within a short time, the lender (mortgagee) will start foreclosure proceedings.
You'll probably wonder about what options are available, and whether there are any alternatives to losing the property and the consequences of foreclosure. The right of redemption is one such option. It's available to you, and others connected to mortgage debt, either under your state laws or it's a term included in your mortgage document.
Defining Redemption Rescue
By the equitable right of redemption, as it's traditionally known, or under specific laws in about half the states, you can redeem or pay off the defaulted mortgage - usually up until the time of the foreclosure sale - and keep the property. State statutes vary on the specifics of how and when the right of redemption may be exercised.
Once you redeem, you own the property. The mortgage is paid and you're done with the lender. Unless, of course, you have more than one mortgage. If so, the other lenders still have a right to the property if you default on their loans.
Some states also provide for a related remedy called reinstatement. This lets you to bring payments on the mortgage up to date, with the mortgage remaining in full force and effect. Reinstatement may be a one-time or last chance to catch up, depending on state law.
Redemption Isn't Just for Borrowers
The borrower isn't the only party who can redeem a mortgage. Redemption can be used by:
- The borrower
- Successors of the borrower, should the borrower die, or assignees of the borrower
- The borrower's judgment creditors
- Anyone with a lien against a property
- The borrower's bankruptcy trustee
Redemption statutes also usually set out the priorities among the parties with rights of redemption, that is, who can exercise the right first, second, etc.
State Statutes and Redemption
Typically, the equitable right of redemption ends at the time of the foreclosure sale. But some states have laws changing that time period, making it anywhere between 6 to 18 months after a foreclosure sale. However, in some states, like Illinois, the redemption period ends before the foreclosure sale.
Property Title and Possession Following a Foreclosure Sale
In some states, the winning buyer at the foreclosure sale doesn't get title to the property until the redemption period ends. So, you, as the borrower, may keep possession of the property during that time. When the redemption period closes, if the buyer hasn't been paid the redemption amount, he or she gets title to the property.
In other states, the foreclosure buyer takes possession of the property under a defeasible title. You can exercise your right to redemption by making the required payment. Then you can move back in.
Deciding on Redemption
Redemption may be the answer for you if:
- You want to keep the property
- You have the chance to sell the property and pay off the mortgage (especially if property prices are rising)
- You can refinance the debt
Another factor to consider is the likelihood that the hit to your credit rating will be less severe if your credit report shows "redemption" instead of "foreclosure." Also, because foreclosure is often complicated and expensive, lenders usually are open to working out a redemption or reinstatement.
Your redemption rights shouldn't be cast aside lightly. These rights exist because avoiding a foreclosure sale is often in the best interest of both you and the lender.
Questions for Your Attorney
- Does redemption include costs the lender incurred in starting foreclosure?
- Can I transfer or sell my right to redemption to someone else?
- What's the redemption period in our state?