My House Is In Foreclosure – Can I Rent It?

This is a good question. The answer is YES, but you are advised against doing so on both ethical and legal grounds.

Foreclosure Laws are different from state to state in the US; each state has different laws regarding how mortgage lenders can conduct a foreclosure process and how they retrieve their money. There are two methods of foreclosure process – judicial and non-judicial procedures. In the first case, it takes a lot of time to complete a foreclosure-it has to go through a whole legal process at a court of law before it is sold. Filing a lawsuit against a homeowner who has defaulted, issuing a legal notice of Lispendens ( a matter pending in a Court), conducting a trial in order to prove a homeowner has defaulted, getting a court order enabling you to dispose of a property and finally selling the property to the highest bidder all are parts of the lengthy foreclosure process. At times, it can take more than a year to finalize the foreclosure and sell of the house.

In a 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 these 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 differences between the period of finalization and the public auction are how they governed. There is never any denial when a house is being put through the foreclosure process.

That being said, the right of ownership lies with the home owner until the property is sold at a public auction. A homeowner also has the right to occupy their house for a reasonable period because it is humane to give them this privilege. However, renting out a foreclosed home is an entirely different matter.

Even though a house can still be lived in while it is going though foreclosure, it still must be forfeited by the homeowner once it is sold. Any home owner entering into a rental agreement while a home is going through foreclosure faces two types of violations – ethical and legal. Although there is no law or ethical code that regulates the moral character of a landlord, it is still not right to hide the fact that a house is going through foreclosure from tenants. The tenants will have to face eviction by the mortgage lenders after foreclosure and the attendant ordeals. The moral duty of telling his or her tenants is left to the landlord’s conscience.

However, a malicious landlord who does these things will face punishment. Once the landlord knows that a default notice has already been filed, he will be committing fraud if he rents out the house while knowing his house is going through foreclosure.

However, one can always find calm in a financial tornado. If your house is in a state permitting only judicial foreclosure and you reasonably expect the final eviction of the tenant, it will not materialize at least for a year from now and you will be allowed to rent out your home to tenants, surely placing every detail about the prospect of foreclosure to the tenants before leasing any part of it. There is also a significant amount of risk in renting out rooms on the parts of both the tenants and the homeowner.