What Happens if You're Renting a House & It Goes Into Foreclosure?
The housing market crisis that began in 2007 spawned a record number of foreclosures. Homeowners and tenants have felt the impact, as both groups find themselves having to calculate when the bank takes possession of the property. Federal legislation protects the tenants of foreclosure properties, granting them more time to find a new home.
The Basics
Foreclosure is the legal process by which a lender deprives a borrower of his ownership right to a property that secured a mortgage or deed of trust. It occurs because the borrower defaulted on his mortgage. The foreclosure process generally takes several months to complete. It culminates in the sale of the property by public auction or by the lender taking possession of the home. The default period prior to the foreclosure sale is called the preforeclosure period. It is during this time, which typically lasts at least three months, that the tenant may be notified of the foreclosure proceedings, either by the lender or landlord.
Protections
The Protecting Tenants at Foreclosure Act of 2009 put an end to the loss of a lease due to bank repossession or sale to another individual. It provided month-to-month tenants at least 90 days after foreclosure to move out -- a more generous time frame than what they had under regular landlord-tenant law. Tenants with lease agreements that surpass the foreclosure date are allowed to remain in the home until the lease expires, under the provisions of the act.
Other's Rights
Although the act extended tenants rights in foreclosure, other changes may take place in preforeclosure and afterward. In foreclosures that involve commercial real estate, and sometimes residential rental property, the lender may require that the tenants pay rent directly to them, rather than to the homeowner. State law determines the extent to which a lender can enforce this assignment of lease or rent clause. A tenant with a long-term lease agreement may have to move as soon as 90 days after foreclosure, despite the act. A new owner who intends to occupy the home as his principal residence may extinguish the original lease agreement.
Considerations
A lender who collects rent payments from tenants during foreclosure is not obligated to maintain the property or perform repairs. The borrower is still obligated to perform his duties as the homeowner and landlord, including paying utilities if part of the agreement. A tenant may consider suing a landlord in small claims court for his loss of "quiet enjoyment" due to foreclosure proceedings. The tenant may sue for damages for loss of lease, lack of maintenance and repairs, moving costs and the expense of obtaining a new rental, according to NOLO.
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