Although it's widely accepted that homeowners are the underdogs in foreclosure proceedings, they're not entirely defenseless. Some states, such as California, have passed legislation specifically to protect homeowners when lenders foreclose on their homes. Laws can vary from state to state, but some general rules apply.
When California enacted its Homeowner Bill of Rights in January 2013, the law made it illegal for lenders to proceed with foreclosure proceedings until they have either approved or denied homeowners' applications for loan modifications. As with most rules, homeowners must qualify for this protection. The law relates only to personal residences, not investment properties. Participating lenders in all states can also help qualifying homeowners modify their mortgages under the federal Making Home Affordable modification program.
Reinstatement allows homeowners to bring their mortgages current to avoid foreclosure, even if their lenders have already initiated foreclosure proceedings. In states that provide this option, the rules can vary. In Virginia, for example, you must usually pay all your loan arrears, plus any late fees and your lender's costs. You can then resume making your current payments and your lender must drop the foreclosure action.
Although it doesn't always happen, sometimes the sales price exceeds the amount of the loan balance when foreclosed properties sell at auction. Some states, such as Illinois and Florida, give homeowners the right to make a claim for these excess funds. Junior lien holders sometimes have this right as well, however, so it's not guaranteed that you'll receive any cash back if another lender also makes a claim.
Some states give homeowners the right to redeem their homes after the foreclosed properties sell at auction. This remedy is typically available in states that require or allow for judicial foreclosures – those where a lender must proceed through the court system, gaining approval from a judge first. Redemption usually involves reimbursing the winning bidder for whatever he paid for the home, as well as any foreclosure costs, interest, and other fees. In states that allow redemption, your lender typically has a legal obligation to provide you with a written summary of everything you must pay to redeem your home, but you have to make the request – it doesn't happen automatically.
If all else fails and you do lose your home, the new buyer usually can't toss you out on the street the day of the sale. He must file another lawsuit with the court, asking for possession of your home. In most cases, you have the right to continue to live there until the court orders you to leave.
- Illinois Attorney General: Homeowners' Rights
- Nolo: California Foreclosure Protection – The Homeowner Bill of Rights
- MassLegalHelp: Rights of Former Homeowners After Foreclosure
- Miami-Dade County Clerk of Courts: Homeowners Rights in Foreclosure Proceedings (PDF)
- Virginia General Assembly: HB890 – Mortgage Foreclosure; Right to Reinstatement
- Making Home Affordable: Home Affordable Modification Program
- Jaburg Wilk: Judicial Foreclosure Creates Conflict for Redemption Rights and Fair Market Valuation
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.