My wife, children, and I currently live in Memphis, Tennessee. We want to move to a bigger home, but the kids don’t want to have to change schools, so we’re looking for a house in a particular area. While there aren’t many homes available for sale that meet our needs, there are a few houses in foreclosure in the neighborhoods we like. Still, I have a few concerns about purchasing a home at a foreclosure sale. My primary worry is that the former owners might be able to take the house away from us even after the foreclosure sale if they can come up with enough cash. Can this happen?
Yes, it is possible, although very uncommon, for Tennessee homeowners to get the home back after a foreclosure by paying you the purchase price you paid at the sale, plus various other amounts. This is called redeeming the property. (It is also possible that another party, such as the IRS, could redeem the home after the foreclosure sale in certain situations.)
However, under Tennessee law, if the documents that the homeowners signed when taking out the mortgage waive the right of redemption, they can't get the house back after the sale.
We’ll describe below the situations when you could potentially lose the home after the foreclosure sale in Tennessee, just how likely this is to occur, and whether the possibility of a redemption should affect your ability to feel comfortable about buying a home this way.
Foreclosed homeowners in Tennessee get two years after the foreclosure sale to redeem the home (Tenn. Code Ann. § 66-8-101, § 66-8-102). However, if the mortgage or deed of trust that the former owners signed when taking out the loan specifically waives the right of redemption, they can't redeem the home at all (Tenn. Code Ann. § 66-8-103). (Learn about the difference between a mortgage and deed of trust.)
Virtually all loan documents in Tennessee contain a clause stating that the homeowners waive the right of redemption. What this means for you is that the former homeowners probably won’t get the opportunity to get the home back after the sale.
To find out what the mortgage or deed of trust says, you can:
If the former homeowners get the right the redeem, they would have to reimburse you the amount you paid for the home, plus interest and all other lawful charges (Tenn. Code Ann. § 66-8-106).
Homeowners don’t redeem very often and it’s pretty clear why. In most cases, they don’t get the opportunity to do so, and those who do would have come up with not only the purchase price you paid at the foreclosure sale, but additional amounts as well. Homeowners who’ve gone through a foreclosure typically aren’t able to find financing for this due to a bad credit score. (Late mortgage payments and foreclosure severely damage a homeowner's credit score.)
While it’s not likely that the homeowners will be able to redeem (either because they aren't given this right or they can’t finance it), it is possible that another party, such as a creditor or the IRS, could redeem the home after the foreclosure sale under some circumstances.
For example, some properties that are sold at a foreclosure sale are subject to a 120-day IRS redemption period (or the allowable period under state law, whichever is longer). This occurs when there is a federal tax lien on the home at the time of the foreclosure.
If the IRS decides to redeem the house, the U.S. government would reimburse you for the price you paid at the sale, plus interest and certain expenses. This doesn't happen very often either, though. The IRS would only redeem if it believed it could sell the home for more than you paid at the foreclosure sale.
To find the statutes that discuss the right to redeem after a foreclosure in Tennessee, go to Title 66, Chapter 8 of the Tennessee Code.