If you can’t make your mortgage payments, you risk foreclosure—where your lender takes possession of your home and sells it to recoup costs.
However, a clause known as the right of redemption can serve as a last resort for homeowners and potentially help them stay in their home. This legal right allows borrowers to reclaim their homes before (and in some cases, after) a foreclosure. Unfortunately, exercising the right of redemption requires a significant cost, and simply isn’t feasible for most borrowers.
Here’s what to know about the right of redemption, who this right protects, and how to exercise your right of redemption if you’re struggling to keep your house.
What Is the Right of Redemption
The right of redemption comes into play when a borrower has defaulted on their mortgage due to missed payments and serves as a second chance for borrowers to remain in their homes. It’s a contractual or statutory right that allows homeowners facing foreclosure to reclaim their property by paying the full amount due on their mortgage, including any interest or fees due.
There are two primary types of right of redemption: equitable right of redemption and statutory right of redemption.
The equitable right of redemption allows borrowers to reclaim their mortgage by paying the full amount owed on their mortgage before the foreclosure is finalized. In an equitable right of redemption, the borrower must pay the full amount owed on the mortgage, including interest and fees.
The statutory right of redemption allows borrowers to reclaim their homes after a foreclosure, but only until a certain point. In a statutory right of redemption, the borrower must pay the foreclosure sale price to reclaim their home.
While the equitable right of redemption is afforded to all borrowers in their mortgage notes, the statutory right of redemption is a statutory right afforded under certain states’ laws.
Who Can Exercise the Right of Redemption?
The right of redemption is a right that borrowers facing foreclosure have in all 50 states.
“When someone applies for a mortgage, the house itself serves as the collateral for the loan,” says Megan Bellingham, Head of Mortgage Operations at the mortgage lender Better. “Since the house is not fully paid for, the borrower forfeits ownership of the home if they default on their payments. This is usually included in the mortgage notes in a section called right of foreclosure,” she explains.
In addition to the right of foreclosure, the mortgage note will also outline the right of redemption, disclosing what a borrower must do to stay in their home.
While all mortgage borrowers can exercise a right of redemption, borrowers in some states have more rights than others. As mentioned before, all borrowers have the equitable right of redemption, while borrowers in only about half of U.S. states have the statutory right of redemption.
The states that allow statutory right of redemption (meaning redemption after the foreclosure sale) are:
- New Jersey
- New Mexico
- North Carolina
- North Dakota
- South Dakota
The time period after a foreclosure in which borrowers can reclaim their property varies by state, but often it’s until the court confirms the foreclosure sale.
How Right of Redemption Protects Borrowers
The right of redemption is designed to give borrowers one last chance to stay in their homes before a foreclosure. Those states that allow for statutory right of redemption provide even greater protection to borrowers by allowing them to redeem even after the foreclosure is done.
“It is uncommon for defaulting borrowers to be able to redeem, because they must satisfy the entire debt obligation to avoid foreclosure,” says Shawn Masterson, a real estate attorney and founding partner of the law firm Shapiro Dorry Masterson, LLC.
Borrowers facing foreclosure have already defaulted on their mortgage, likely due to financial hardship, Masterson points out. It’s unlikely those same borrowers would then be able to pay off their entire mortgage. For some borrowers, exercising this right would require a payment of hundreds of thousands of dollars.
“However, the protection afforded the borrower through the right of redemption is the notice provided to the borrower of their right to redeem before any foreclosure can occur,” Masterson says. “Most mortgagors do not read the mortgage loan documents and are unaware of their right to save their home from foreclosure by satisfying the debt. The foreclosing mortgagee must provide the notice of the right to redeem, including the time frames, before it can foreclose its mortgage,” he says.
How to Exercise Right of Redemption
To exercise the right of redemption, a borrower must pay the full amount they owe on their mortgage, including any interest, fees, or servicing fees owed. The right of redemption comes into play when a borrower has defaulted on their mortgage and is facing foreclosure.
“The borrower is alerted about the missing payments, and receives a specified amount of time to make good on said late payments in order to avoid foreclosure,” Bellingham says. “If payments are not met in the specified time, the lender will sell the property in order to recover the money lost on the loan. The right of redemption then follows. It gives the original borrower the opportunity to reclaim their property and stop the foreclosure sale from happening,” she adds.
If you have the funds to exercise your right of redemption, you can contact your mortgage lender to find out how you can exercise your right, the total amount you must pay, and the date by which you must exercise your right of redemption.
Alternatives to Exercising the Right of Redemption
While the right of redemption can help a borrower to stay in their home, there are simpler and more affordable options available. If you’re facing financial hardship and are struggling to make your mortgage payments, contact your lender.
Some mortgage lenders allow borrowers to pause or modify their home loans through mortgage modification or forbearance. Typically, forbearance programs are temporary, but they may offer you a few months of relief while you formulate a plan.
To take advantage of these options, it’s important that you reach out to your lender before you actually default on your loan. Ask them what financial hardship programs they have available, whether they come with fees, and whether they report missed payments to the credit bureaus.
Even if your credit score takes a temporary hit, staying in your home is likely preferable to foreclosure. The most important thing is to be aware of the pros and cons of all your options so that you can make an informed decision for you and your family.