Am I able to rent if my property is in the middle of the foreclosure process?
Foreclosure is a complicated process that many homeowners do not understand. Even for landlords, they may not be sure of what they are allowed to do with their rental properties, and if they can collect rent money by having a tenant living in a home that is in the foreclosure process.
Understanding the Foreclosure Process
Foreclosure does not just happen; it’s a process that takes place over several months. Homeowners fall behind on their payments, and foreclosure allows a lender to take ownership of the property to gain the money owed. After the homeowner falls behind on the mortgage payments, the lender files a public default notice, which is referred to as a Notice of Default. At this point, the homeowner has four options to stop foreclosure:
- Pay off the default amount to reinstate the loan to a current status – this is known as the pre-foreclosure period and is determined by state law
- The owner sells the property during the pre-foreclosure time and pays off the loan
- A buyer purchases the property at a public auction at the end of the period of pre-foreclosure
- The lender takes right of ownership with the goal of resale
Alternatively, the owner can give the right of ownership to the lender during the pre-foreclosure process, or the lender can buy it back at a public auction or through a short-sale foreclosure.
When Your Foreclosure is a Rental
Whether you are a homeowner or a landlord, the foreclosure process is the same. You are still responsible for making the mortgage payments on time, and the lender may pursue foreclosure if you default on the loan. The goal, in either case, is to avoid foreclosure altogether or to stop the foreclosure process if it has already begun. However, there are some key differences if you are renting out a home to a tenant when you default on the loan.
New programs have been put in place to help homeowners who are in danger of foreclosure. Not all of these programs apply to properties that are in use as rentals. Some regulations stipulate that the property must be the owner’s primary residence. For instance, the Home Affordable Modification Program was originally only for owners where the home was a primary residence. Some changes were made to allow owners of rental properties to be eligible. Landlords may be limited to the modification terms of their lender if they don’t qualify for government programs.
How Foreclosure Affects Your Tenants
Tenants have the right to end out their lease in a foreclosed property thanks to the Protecting Tenants at Foreclosure Act of 2009. This law enables residents to remain in the home until the end of their lease. If they are a month-to-month tenant, they must be given 90-days’ notice to vacate the property. This law doesn’t allow for owners in foreclosure to rent out a property to family.
Two exceptions are provided in the act which may impact owners and tenants. First, the buyer of the foreclosed property may terminate any lease with notice of 90 days if they intend to live in the property. Second, the tenant may not be the current owner’s parent, child or spouse and the rental amount must be at market price.
You may lose the right to your rent even before the foreclosure process is complete.
Most mortgage paperwork includes a document called the Assignment of Rents or 1-4 Family Rider which allows your lender to collect the rent from your tenant once you have been given the written notice of default. They must also notify your tenant in writing.
Until foreclosure is complete, you are still the owner of the property. This means you are obligated to provide a safe, livable space for your tenant. You are responsible for repairs the same as you would be in a typical rental situation. Your tenant may be served paperwork in the foreclosure, which will tell the judge a tenant is living on the property if they respond with an Answer to a Lawsuit. They will know about any hearings that are scheduled and any other notices regarding the foreclosure. The tenant also has the right to move out regardless of when the lease is due to end. Landlords cannot enforce the lease terms because they have already reneged on their part of the lease.
Tenant Lawsuit
You are also at risk for a lawsuit from your tenant if your property goes into foreclosure and they are forced to move. When you leased the property, you promised the tenant the right to live in the property for a specified period of time. This is referred to as the covenant of quiet enjoyment. You went back on this promise by allowing your property to go into foreclosure. The tenant can sue you for damages, which includes the cost of moving.
If you rented out a property after it was in the foreclosure process, the tenant could sue you for fraud, which may carry even bigger penalties. The tenant just has to prove that you knew about the foreclosure and had defaulted on the loan when you rented out the home.
Stopping a Foreclosure
If you can stop a foreclosure by paying the amount due or by selling the property, it will benefit you to do so. You may be able to find a seller who is another landlord who will allow the tenant to continue living on the property.
When you receive a notice of default, you should know what options are available as soon as possible. The sooner you begin looking for alternatives, the better the possibility of keeping the property. It’s important to take measures to avoid foreclosure by communicating with the lender and finding out what options are available. Once the foreclosure process has begun, you can still stop it from taking action. While your tenant may be protected in the process and continue to have a place to live, you are at risk for losing your property and your credit, both of which will impact you for years.