Equity of Redemption

A home with a foreclosure sign where the owner can use equity of redemption process to reclaim.

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Equity of redemption is the right of an owner to redeem property secured by a loan that has been accelerated prior to foreclosure. For example, Mary is behind on her mortgage payments, and the lender has accelerated the loan—acceleration is a demand for payment in full—or foreclosure will follow. Mary can find another source of money and pay off the principal, interest, and expenses under equity of redemption. Put simply, paying off the loan with funds from another source allows Mary to keep the home.

In some states, there is also the statutory right of redemption, providing a certain amount of time in which, after foreclosure, the owner can redeem the property by paying off all demands and costs.

The Mortgage

When you buy a home with a down payment instead of paying in full, you will be taking out a loan, or mortgage. The mortgage is guaranteed by the property. In other words, if you don't pay as agreed, the lender can take the property and sell it to get back its investment. Sometimes lenders can recoup their losses, but many times they cannot. These days, most mortgages are guaranteed in part or in full by a government or quasi-government entities such as FHA, Federal Housing Administration, Fannie MaeFreddie Mac, and USDA rural loans.

The government's guarantee helps people to qualify for loans they couldn't otherwise get without some assurances made to the lender. It also ensures that the lender will get partial or full relief if the borrower defaults. Lenders must meet certain requirements for the guarantee, some of which are the ways in which they qualify the borrower, and the requirements they place on the borrower to get the loan. Examples are the down payment and credit score requirements.

When Things Go Wrong

When a borrower runs into financial troubles and can't keep up with mortgage payments, the lender will, at some point, make a demand for payment in full or "accelerate" the mortgage. This means that the borrower must catch up on payments or pay the whole amount in full to avoid foreclosure.

If the lender issues a demand for payment in full, the borrower can seek another financing source and pay the balance in full, plus interest and penalties. Of course, if the borrower is in financial trouble, it is unlikely she will find a funding source to help her pay off the loan. If the borrower can find the money, however, she can "redeem" the property.

Some states even allow borrowers to come back after foreclosure or tax seizure and pay the amounts in arrears to get back their homes. A redemption period can last a few months or up to a few years in some cases. This is something investors need to be aware of, especially if they specialize in buying foreclosed or seized properties. In states where consumers have the right to redemption, there's always a risk that they could come up with the money to reclaim their homes.