Is Your Landlord Underwater? Protect Yourself from Foreclosure When Renting

This post is from Casey Bond at GoBankingRates.com

As the value of property across the country continues to fall, your landlord might be struggling to make mortgage payments – or even have an underwater mortgage that he’s considering abandoning.

“Strategic default” is increasingly being chosen as an option when a home is worth less than the mortgage. Some homeowners are ditching their houses because they’re no longer good investments. Earlier this year, it was reported that about 28 percent of homes are underwater.

Many more mortgage holders simply can’t keep up with payments any longer.

The major problem is that these people aren’t always living in the homes – they’re renting them out. Although a lot people are trying to protect themselves from depressed home values and rampant foreclosures by putting off their dreams of homeownership, many of these renters end up losing their homes to foreclosure anyway, even though they’re current on all their bills.

When a home goes through the foreclosure process – which can include a trial – the landlord remains the owner until the foreclosure is final. Once it goes through, however, a new owner is assigned. This is often the lending financial institution.

There’s plenty of incentive for the new owner of a foreclosed rental property to get rid of the tenant rather than accept continued payments. In order to recoup the remaining mortgage balance, the lender taking the house back will usually attempt to sell it. This is much easier to do when no one is living there. With thousands of dollars on the line, they may be in a hurry to clear out the property.

While renters used to be forced out onto the street with as little as 24 hours’ notice by banks and new landlords, there are now laws in place to protect tenants in this troubled situation.

If you find out that your landlord is indeed going through the foreclosure process, it’s important to stay in your home for as long as possible until you can find a new place. So how do you protect yourself from being forced from your home, even though you’re not the mortgage holder?

Step 1: Keep paying rent

Even if you’re fairly sure the current homeowner is going to lose the property to foreclosure, keep making payments toward the rent until you are told otherwise. It may seem like a giant waste, but failing to pay rent means you could be evicted.

Your landlord may lose ownership of the home, but that doesn’t necessarily mean you will lose the option to live there. Who knows? You might get to stay after all, so don’t give them a reason to kick you out anyway.

Step 2: Speak with a lawyer

When it comes to foreclosure and renter rights, some laws vary by state. It’s always best to discuss your circumstance with a legal professional. Plus, it’s good to have someone on your side in case the old landlord or new owner tries to scare you into leaving early.

At the very least, talk to a lawyer about your situation and find out if there are any obvious legal issues that will require representation.

Step 3: Take your time looking for a new place

Even if you will be forced to move out eventually, you have time on your side. Legally, the lender cannot make you move out while the foreclosure is in process, as the landlord is still the owner. Then once the foreclosure is final, you still have at least 90 days to pack up.

In fact, thanks to the Protecting Tenants at Foreclosure Act of 2009, you might have longer than 90 days if any of the following apply:

  • Lease: If you signed a lease that ends after the 90 days following foreclosure, you are allowed to stay for the duration as long as the new owner doesn’t plan to live there.
  • Senior: You are at least 62 years old.
  • Disability: You have a physical disability and can prove it.
  • Section 8: The new owner must honor a Section 8 voucher, as long as the lease is current and the tenant doesn’t give any reasonable cause to be evicted.

Keep in mind that things work a bit differently if you’re named as a defendant in the foreclosure trial, but that’s when following Step 2 is crucial.

How to convince the new owner to let you stay

If the new owner is a bank or other type of financial institution, they might not be interested in renting out the property. Offer to pay rent anyway, but don’t mail a check to the old landlord! Instead, send a letter to the new owner explaining that you’d like to continue living in the home and ask who will be in charge of accepting payment.

As a long-term financial strategy, the bank may actually choose to hire a management company and continue renting until property values go back up. More than likely, however, they will want to sell it as soon as possible.

It might feel like the foreclosure crisis is impossible to escape, even if you choose to rent instead of own. Sadly, that’s true for thousands of renters.

However, being fully aware of your rights will ensure you aren’t bullied by a lender or forced out of your home without due notice. Remember that you haven’t done anything wrong – it may be a scary situation but the law is on your side.

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