My House is in Foreclosure – Can I Continue Renting it?

This is a good question and the answer is yes. But you are advised against doing so on both ethical and legal grounds. If you were already renting, you can continue to do so. This can only happen if you sign a lease on the property. However, this is not applicable in certain circumstances, which are the following:

• You are actually the borrower.
• You are the child, spouse or parent of the borrower.
• The lease agreement was not between two total strangers; this means that you have a familial connection with your landlord.
• You are paying less than what your rent typically would cost on the market.

However, most of the times tenants renting out in properties that are experiencing foreclosure usually have rights, as stipulated under Protecting Tenants at Foreclosure Act of 2009.

Foreclosure laws vary from state to state in the US.Each state has different laws regarding how mortgage lenders can conduct a foreclosure process and how they retrieve their money. There are two types of foreclosure processes – judicial and non-judicial procedures. In the first case, it can take a long time to complete a foreclosure — it has to go through a whole legal process in a court of law before it is sold off.

Filing a lawsuit against a homeowner who has defaulted, issuing a legal notice of lispendens (a matter pending in a Court); conducting a trial in order to prove a homeowner has defaulted; getting a court order enabling you to dispose of a property and finally selling the property to the highest bidder all are parts of the lengthy foreclosure process. Sometimes it can take more than a year to finalize the foreclosure and sell the house.

In a non-judicial foreclosure process, the foreclosure period is relatively smaller. By a clause in the home loan mortgage deed, the lender can hasten the “trustee sale” of public auction to the highest bidder or take re-possession of the property. At best, this can take only a maximum of 4 to 5 months.

In both these cases, it is mandatory for the mortgage lender to send a notice of default to the home owner. From the moment the notice is served, the foreclosure of the property is deemed to have commenced.The only difference between the period of finalization and the public auction are how they are handled. There is never any denial when a house is being put through the foreclosure process.

That being said, the right of ownership lies with the home owner until the property is sold at a public auction. A homeowner also has the right to occupy their house for a reasonable period because it is humane to give them this privilege. However, renting out a foreclosed home is an entirely different matter.

If you plan to rent out your home while it is in a pre-foreclosure state, you need to tell any potential tenants about the issue.

Even though a house can still be lived in while it is going through foreclosure, it still must be forfeited by the homeowner once it is sold. Any home owner entering into a rental agreement while a home is going through foreclosure faces two types of violations – ethical and legal. Although there is no law or ethical code that regulates the moral character of a landlord, it is still not right to hide the fact that a house is going through foreclosure from tenants. The tenants will have to face eviction by the mortgage lenders after foreclosure and the attendant ordeals. The moral duty of telling his or her tenants is left to the landlord’s conscience.

However, a malicious landlord who does these things will face punishment. Once the landlord knows that a default notice has already been filed, he will be committing fraud if he rents out the house while knowing his house is going through foreclosure.

However, one can always find calm in a financial tornado. If your house is in a state permitting only judicial foreclosure, and you reasonably expect the final eviction of the tenant, it will not materialize at least for a year from now and you will be allowed to rent out your home to tenants, surely placing every detail about the prospect of foreclosure to the tenants before leasing any part of it. There is also a significant amount of risk in renting out rooms on the parts of both the tenants and the homeowner.