The drama of foreclosure doesn't always end after the auction. The right of redemption can be an ally of a defaulting homeowner and a problem for both lenders and bidders at a foreclosure sale. Smart real estate investors will know before bidding if a property is subject to redemption after the sale. The existence or absence of a right of redemption after foreclosure can affect who bids and the price obtained at auction.
States usually permit two types of redemption in foreclosures. Equitable redemption is a common law right of the borrower to redeem -- or regain -- his property by paying all late mortgage payments prior to the foreclosure sale. Statutory redemption, on the other hand, is a right granted by a state legislature to redeem property after the foreclosure sale for a specific period of time by paying the full price paid at the foreclosure sale.
Redemption and Judicial Foreclosure
The statutory right of redemption is often available in judicial foreclosures. In a judicial foreclosure, the lender commences a court proceeding seeking an order from a court to foreclose and sell the property at an auction to the highest bidder. If there is a statutory right of redemption, the bank will be able to sell the property at auction, but the defaulting borrower will have the right to reside on the property and redeem it during the statutory period, which varies from state to state.
While a right of equitable redemption exists in non-judicial foreclosures, there is no right of statutory redemption. You agree to a non-judicial foreclosure in your deed of trust. In a non-judicial foreclosure, the lender doesn't have to go to court to get permission to sell the property. It usually needs only to provide a notice of default to allow you a chance to become current and then, after a set period of time, provide a notice of sale. The property will then be auctioned.
Properties that are subject to statutory redemption have implications for all parties: the borrower, the lender and the bidder. The borrower must decide if it's in her financial interest to make an attempt to redeem the property. The lender will have a harder time getting a good price at auction because of the added risk to the bidder that the property will be redeemed, and a bidder may not want to tie up money in a property that may be redeemed.
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