What Happens to Tenants When a House Is Foreclosed?
The subprime mortgage meltdown that continues to rock the real estate market can affect more than just an owner who loses his home to foreclosure. A tenant who is renting a property that's in pre-foreclosure yet, has no idea that the mortgage is in default is often the unwitting victim of a landlord who accepts rent without informing the tenant of the impending foreclosure. A tenant's options depend on the type of lease he signed.
Prey for Unscrupulous Landlords
A landlord who wants to pocket rental money while skipping out on the mortgage may be making a nice income off the impending foreclosure. A landlord is required to disclose information that may affect the tenant's decision to sign a lease, including the possibility of foreclosure. If he does not, he may be committing fraud. Tenants now have help from the government that gives them more time to find a new home in the event of foreclosure.
New Law Enacted
Prior to May 20, 2009, a tenant who lived in a foreclosed home may have been locked out or evicted by the sheriff or lender. The "Helping Families Save Their Homes Act," signed into law by President Obama, rewrote the rules. This law protects paying tenants who are living in a foreclosed home. Under the new law, the tenant's existing lease must be honored, unless the new owner wants to take occupancy of the home, in that case the lease can be terminated with 90 days' notice. An exception to this is a month-to-month tenancy; in that case, a 90-day notice is required to remove the tenant from the home. Normally, the month-to-month tenant got only 30 days' notice.
The New Owner
The new owner of the home must lawfully evict a tenant who remains in the home. Eviction processes vary, depending on the state. If the new owner terminates the lease to move into the home, the tenant may lose his lease even if there is a full year remaining in 90 days' time. Had the owner sold the property, instead of letting it foreclose, the new owner would have had to wait for the lease term to end before taking occupancy of the home.
Considerations
A tenant who has been the victim of a foreclosure may seek damages from the original landlord in small claims court. The damages may be equivalent to the actual cost of moving plus any increase in the cost of his rent plus the deposit, if it wasn't returned by the original landlord. The tenant must prove that the landlord intentionally failed to inform the tenant that the home was in foreclosure.
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