My House Is In Foreclosure - Can I Rent It?
Wednesday, November 12th, 2008
This is a good question. The answer is YES, but you are advised against doing so on both ethical and legal grounds.
See the Foreclosure Laws are different from State to State in the US, governing the procedures to be followed by the mortgage lenders, in proceeding with the foreclosure process to retrieve their money. There are two methods of foreclosure process – Judicial and Non-judicial. In the first case it takes a lot of time to finish the foreclosure process as it has to be gone through a Court of Law. Filing a Law suit against the defaulted home owner, issuing legal notice of Lispendens (matter pending in a Court); conducting the trial to prove default; getting a Court order to dispose off the property through public auction in the Court premises and finally selling the property to the highest bidder – all these will undoubtedly prolong the period of foreclosure. At times it can take more than a year to finalize the foreclosure and sell or take re-possession of the property.
In the Non-judicial foreclosure process, the foreclosure period is relatively less. 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. (Refer ForeclosureListings.com).
In both the 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. So the only difference is in the period of finalizing the sale by foreclosure public auction, in accordance with the Law of the State in which the property is situated. There is no denying the concerned property is under foreclosure process.
That said the right of ownership lies with the home owner, till the property is sold by foreclosure public auction. Also the right of occupancy of the house by the home owner continues for a reasonable period on humanitarian grounds and principles of natural justice. But renting out the said property is totally a different matter.
Having come to understand that the house is under foreclosure and is going to be forfeited once the public auction is completed, the home owner entering into a rental agreement faces two violations – ethical and legal. Although there is no law to regulate the moral character of a landlord or there is no ethical code of conduct stipulated as in the case of doctors, lawyers, brokers or other professionals, still it is not strictly ethical to conceal the fact of foreclosure to the tenants. The tenants will face eviction by the mortgage lenders after foreclosure and the attendant ordeals. So the ethical aspect is left to the landlord’s conscience.
But the legal aspect is surely punishable. Once the landlord knows that a Default Notice has already been served and the house is lying under foreclosure process, it amounts to fraud legally to rent out the property and is therefore punishable.
However there is a breather to this meddle as well. If your house is in a State permitting only Judicial foreclosure and you reasonably expect the final eviction of the tenant will not materialize atleast for a year from now, you can rent your house on month-to-month rental agreement, surely placing every detail about the prospect of foreclosure to the tenants before leasing. This is calculated risk any one can take, if the tenants and landlords so agree.
