What is a deed in lieu of foreclosure?
A deed in lieu of foreclosure is a document that transfers the Title of a property from the owner to its lender in exchange for mortgage debt relief.
Choosing a deed instead of a foreclosure may be less financially damaging than going through a full foreclosure process.
Key points to remember
- A deed in lieu of foreclosure is an option taken by a mortgagor – often a landlord – usually as a way to avoid foreclosure.
- It’s a step that’s usually only taken as a last resort, when the homeowner has exhausted all other options, such as a loan modification or a short sale.
- There are benefits for both parties, including the ability to avoid lengthy and costly foreclosure proceedings.
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Understanding Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is a potential option taken by a mortgagor or landlord, usually as a way to avoid foreclosure.
In this process, the mortgagor assigns the collateral property, which is usually the house, to the lender serving as the mortgagee in exchange for the release of all obligations under the mortgage. Both parties must enter into the agreement voluntarily and in good faith. The document is signed by the owner, notarized by a notary public and registered in public records.
Although the owner will have to give up his property and move, he will be relieved of the burden of the loan. This process is usually done with less public visibility than a foreclosure, so it can allow the homeowner to minimize their embarrassment and keep their situation more private.
If you live in a state where you are responsible for a loan deficiency – the difference between the value of the property and the amount you still owe on the mortgage – ask your lender to waive the deficiency and get it by writing.
Deed in lieu against foreclosure
Deed in lieu and foreclosure look similar but are not identical. In a foreclosure, the lender repossesses the property after the owner has not made the payments. Seizure laws can vary from state to state and there are two ways to seize:
- Judicial foreclosurein which the lender takes legal action to recover the property
- Non-judicial foreclosurein which the lender can foreclose without going through the court system
The biggest differences between a deed in lieu and a foreclosure relate to the impacts on credit rating and your financial liability after the property has been repossessed by the lender. In terms of credit reports and credit scores, having a seizure on your credit history can be more damaging than an act in lieu of seizure. Foreclosures and other negative information can remain on your credit reports for up to seven years.
When you surrender the deed to a home to the lender through a deed in lieu, the lender usually releases you from all other financial obligations. This means you no longer have to make mortgage payments or pay off the remaining loan balance. With a foreclosure, the lender might take additional steps to recover any money you still owe for the home or legal fees.
If you still owe a deficient balance after the garnishment, the lender may take separate legal action to collect that money, which could expose you to wage and/or bank account garnishments.
Advantages and disadvantages of a deed in lieu of foreclosure
A deed in lieu of foreclosure has benefits for both a borrower and a lender. For both parties, the most attractive advantage is usually to avoid long, time-consuming and expensive foreclosure procedures.
Additionally, the borrower can often avoid some public notoriety, depending on how this process is handled in their area. Because the two parties come to a mutually agreeable agreement that includes specific terms as to when and how the landlord will vacate the property, the borrower also avoids the possibility of officials showing up at the door to evict them. that can happen with a foreclosure.
In some cases, the landlord may even be able to enter into an agreement with the lender that allows him to rent the property from the lender for a certain period of time. The lender often saves money by avoiding the expenses they would incur in a situation involving an extended foreclosure proceeding.
In evaluating the potential benefits of accepting this arrangement, the lender must assess certain risks that may accompany this type of transaction. These potential risks include, among others, the possibility that the property is not worth more than the remaining balance of the mortgage and that junior creditors hold liens on the property.
The big downside to a deed in lieu of foreclosure is that it will damage your credit. This means higher borrowing costs and more difficulty getting another mortgage in the future. You can dispute a foreclosure on your credit report with the credit bureaus, but this does not guarantee that it will be removed.
Deed in lieu of foreclosure
Reduce or eliminate mortgage debt without foreclosure
Lenders can lease the property to owners.
Often preferred by lenders
Reasons Why Lenders Accept or Reject a Deed in Lieu of Foreclosure Agreement
A lender’s decision to accept or reject a deed in lieu may depend on several factors, including:
- How late you are in payment
- What is owed on the mortgage
- The estimated value of the property
- General market conditions
A lender may agree to a deed in lieu if there’s a good chance they’ll be able to sell the home quickly enough for a decent profit. Even if the lender has to invest some money to prepare the house for sale, it could be offset by the price at which they are able to sell it in a booming market.
A deed in lieu can also be attractive to a lender who doesn’t want to waste time or money on the legality of a foreclosure proceeding. If you and the lender reach an agreement, it could save the lender money on court costs and other fees.
On the other hand, a lender may reject a deed in lieu of foreclosure if repossessing the home is not in their best interests. For example, if there are existing liens on the property for unpaid taxes or other debts or if the home requires major repairs, the lender might see little return on investment taking over the property. Likewise, a lender may be put off by a home that has dropped in value significantly from what is owed on the mortgage.
If you think a deed in lieu of foreclosure may be in the cards for you, keeping the home in the best condition possible could improve your chances of getting approved by the lender.
Other Ways to Avoid Foreclosure
If you’re facing foreclosure and want to avoid getting in trouble with your mortgage company, there are other options you might want to consider. They include a loan modification or a short sale.
With a loan modification, you’re essentially reworking the terms of an existing home loan so that it’s easier for you to pay it back. For example, the lender may agree to adjust your interest rate, loan term, or monthly payments, which could help get and stay up to date on your mortgage payments.
You can consider a loan modification if you want to stay in the house. Keep in mind, however, that lenders are not obligated to accept a loan modification. And if you can’t prove you have the income or assets to get your current loan and make payments in the future, you may not be approved for a loan modification.
If you don’t want or need to keep the house, then a flash sale could be another alternative to a deed in lieu of foreclosure or foreclosure proceedings. In a short sale, the lender agrees to let you sell the home for less than what is owed on the mortgage.
A short sale could allow you to walk away from home with less damage to your credit score than a foreclosure. But you may still owe any remaining balance after the sale, depending on your lender’s policies and your state’s laws. It is important to check with the lender beforehand if you will be responsible for the remaining balance of the loan when the house is sold.
Is a deed in lieu of foreclosure hurting your credit?
Yes, a deed in lieu of foreclosure will negatively impact your credit score and will remain on your credit report for four years. According to experts, your credit can expect to take a hit of 50 to 125 points by doing so (which is less than the 150 to 240 points or more resulting from a foreclosure).
Which is better: foreclosure or deed in lieu?
Most often, a deed in lieu of foreclosure is preferred to the foreclosure itself. Indeed, a deed in lieu allows you to avoid the foreclosure process and may even allow you to stay in the home. While both processes damage your credit, foreclosure lasts 7 years on your credit report but the deed in place only 4 years.
When can a lender reject an offer of deed in lieu of foreclosure?
Although often preferred by lenders, they may reject an offer of deed in lieu of foreclosure for several reasons. The value of the property may have continued to decline or the property has suffered significant damage, making the transaction unattractive to the lender. There may also be outstanding liens on the property that the bank would have to assume, which it prefers to avoid. In some cases, your original mortgage note may completely prohibit a deed in lieu of foreclosure.
A deed in lieu of foreclosure might be an appropriate remedy if you’re having trouble making your mortgage payments. Before committing to a deed in lieu of foreclosure, it’s important to understand how it may affect your credit and your ability to buy another home later. Considering other options, including loan modifications, short sales, or even mortgage refinancecan help you choose the best course of action.
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