Equity of Redemption
Equity of redemption is the right of a homeowner to redeem a mortgage that's in the process of foreclosure.
Learn more about equity of redemption.
Equity of Redemption Definition and Examples
Equity of redemption allows homeowners who have fallen behind on their mortgage to get caught up and keep their homes. When homeowners fall behind on their mortgage, lenders start the foreclosure process. In this process, lenders take possession of the home and sell it at auction to pay off the mortgage. If the lender has started the foreclosure process, the homeowner can redeem the mortgage using equity of redemption.
For example, Mary is behind on her mortgage payments, and the lender has accelerated the loan, which means the lender has demanded payment in full. If the mortgage isn't paid, foreclosure will follow. Mary can find another source of money and pay off the principal, interest, and expenses under equity of redemption. In other words, 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. This provides a certain amount of time in which, after foreclosure, the owner can redeem the property by paying off all demands and costs.
How Equity of Redemption Works
When you make a down payment on a home instead of paying in full, you take 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 government or quasi-government entities such as the Federal Housing Administration (FHA), Fannie Mae, Freddie Mac, the Department of Agriculture (USDA), and the Department of Veterans Affairs (VA).
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, including how they qualify the borrower and the requirements they place on the borrower to get the loan. Lender requirements may include down payment minimums and minimum credit score requirements.
If you anticipate falling behind on your mortgage payments, talk to your lender as soon as possible. Many are willing to work with you, especially if you have extenuating circumstances like a job loss or high medical bills.
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 they will find a funding source to help them pay off the loan. If the borrower can find the money, however, they can "redeem" the property.
Some states even allow borrowers to return 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.
Investors need to be aware of this, especially if they specialize in buying foreclosed or seized properties. In states where consumers have the right to redemption, there's always a possibility that they could come up with the money to reclaim their homes.
The Bottom Line
Equity of redemption allows homeowners to keep homes that have entered the foreclosure process. However, you may need to pay the balance in full, which may be difficult if you're in foreclosure due to financial difficulties. Laws around foreclosure and equity of redemption vary by state, so if you have questions, your best resource may be a local real estate attorney or legal aid office.