Can I rent out my house if it’s in foreclosure?

I’m always surprised that so many owners in foreclosure (including those who  strategically default) decide to move out of the property early in the foreclosure process. I’d say at least half leave the house as soon as they stop making mortgage payments.

In Illinois, foreclosure takes about 16 months (from the first missed payment) and the owner can live in the property and does not have to make payments during the foreclosure. So it makes economic sense to stay in the property as long as possible. But, many say they just want to “move on” or that they literally hate the property and can’t bear to stay there anymore.

Lately, I’ve seen an increase in the number of owners who move out of the property and then rent it out during the foreclosure process.  Is this legal? As our former Alaska governor would say, “You betcha”

There are some legal and tax consequences to renting the property and one should be aware of these before trying this.

  1. Do I have to tell my mortgage company that I am renting the home? No.Can my mortgage company try to take the rent from me? No, not unless you signed an “assignment of rents” which is pretty rare.
  2. How much rent should I charge? Most landlords charge slightly below market rent.  The  rental market is very hot these days. There’s usually no problem finding a tenant.
  3. Should I do a credit check on the tenant? Yes, even though the property is in foreclosure, I would run a credit check on the tenant so that you don’t put Jack the Ripper in the house.
  4. If I rent my house during a foreclosure, doesn’t that convert it to an investment property? Not necessarily. The definition of primary residence is pretty broad as detailed below.
  5. Can I still call the house my primary residence if I rent it? The Mortgage Debt Forgiveness Act says that there is no tax due on the 1099 issued after a foreclosure if the property is your primary residence.  After a foreclosure, the owner gets a 1099 for the difference between the mortgage amount and value of the property.  The definition of primary residence is this: The owner used the property as his or her main residence for any two of the last five years. So, you can rent out the property for a few years and it will still qualify as your primary residence and there will be no tax owed from the 1099.
  6. Should I tell the tenant the property is in foreclosure? Absolutely. You should be fair and honest about it and disclose to the tenant that the property is in foreclosure.
  7. How long can I rent it out? In Cook County, you can rent out a property in foreclosure for about 14 to 16 months. It depends on what county the case is in and how fast the bank’s attorney moves the case along.
  8. What about homeowner’s insurance? You should change tell your agent that you are renting the property and change your insurance accordingly. There are no contents to insure so the premium may go down. If you leave your homeowner’s insurance in effect and don’t tell your agent you are renting it, and later make a claim, it will be denied since you were not occupying the property.
  9. Will the tenant be served with the foreclosure summons? Usually the tenant is not served with the summons. I has happened a few times lately. That’s one reason you should tell the tenant it’s in foreclosure.
  10. How long can I collect rent? You can collect rent until the sheriff’s sale of the property which is at the end of the foreclosure. You don’t own it anymore after the sheriff’s sale.
  11. Will the tenant be kicked out by the sheriff? The foreclosing bank gets an order of possession about 60 days after the sheriff’s sale (the sheriff’s sale  is about  12-14 months into the process). An order of possession can be placed with the sheriff and the tenant could be evicted.
  12. Do I have to pay income tax on the rent I get? Yes.


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Related posts:

  1. Investment property: When to file bankruptcy in a short sale or foreclosure
  2. Foreclosure and deficiency judgments
  3. Unwelcome surprise: 1099 after foreclosure and short sale
  4. Strategic Default in Illinois: Q&A
  5. High earners & short sales

2 thoughts on “Can I rent out my house if it’s in foreclosure?

  1. We are tenants of a landlord in foreclosure in Cook County. The following entries were added to the court record on Lexis-Nexus:
    Does this mean a foreclosure judgment has been finalized or that the actual foreclosure judgement hearing is still pending? What has been “entered?” Has the 90-day redemption period started? Thanks.

  2. Douglas, This link explains that tenants have 90 days or until the end of their lease (if current on rent). In your case, a judgment of foreclosure was entered, but the sheriff’s sale will not be for 3 months or so after that. The 90 day notice is not given until after the sheriff’s sale. So you have at least 6 months, probably more. I usually try to arrange a “cash for keys” payment to you from the new owner after the sheriff’s sale. It’s hard to explain all this in an email. If you want to discuss it by phone, give me a call and I will be happy to run through it with you. Best regards, Tom

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