What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a deed instrument in which the borrower gives title and all interests in their property used to collateralize a loan to the lender to satisfy a loan in default to avoid foreclosure proceedings. When a borrower gets a loan for a house, they sign a mortgage document called a promise to pay called a promissory note. This note has provisions to protect the lender in case of borrower default. One of these provisions states that the property purchased will be used for collateral in the case of default. These provisions protect the lender's investment because they allow the lender to seize the house upon borrower default to recover invested funds. This transfer is the essence of a deed in lieu. The deed in lieu of foreclosure is an excellent alternative to foreclosure because it benefits both the mortgage company and the borrower, as it spares both parties the trouble and expense of a lengthy foreclosure proceeding. A deed in lieu is commonly called a "cash for keys" agreement. The goal of the borrower in a deed in lieu is twofold; to see if they can qualify for a mortgage release and rid themself of any deficiency for any outstanding mortgage balance.
Advantages of a Deed In Lieu
The foreclosure process costs banks thousands of dollars in additional fees when forced to foreclose on mortgage loans. Therefore, accepting a deed in lieu of foreclosure often makes good financial sense for the mortgage lender. For example, suppose the borrower does not have the cash to satisfy the delinquent mortgage. In that case, the bank may offer the property owner the opportunity to sign a deed in lieu, so they can take back the house without incurring the ongoing attorney fees and other miscellaneous fees involved in a foreclosure. These miscellaneous fees can include title search fees (looking for junior liens), process server fees, and property preservation fees.
A deed in lieu of foreclosure has its advantages for the borrower too. When borrowers are behind on their mortgage payments and sign a deed in lieu, they are essentially giving their property back to the bank in exchange for forgiveness of mortgage debt. A deed in lieu agreement involves the voluntary transfer of your home's deed to your lender. Lenders also can give the borrower assistance in the form of cash for relocation expenses. Properties that are eligible for a deed in lieu usually do not have any equity and are deemed underwater, meaning the borrower owes more to the lender than the fair market value for the house. A borrower may get a mortgage release by completing a deed in lieu. The deficiency is the difference between the outstanding debt and what the property can sell for. By voluntarily giving your deed to your lender and maintaining your home, your lender may be willing to forgive or significantly reduce your deficiency. Borrowers will want to pursue a deficiency waiver from the mortgage company to mitigate their risk after the transfer is complete. The lender does not have to waive the deficiency judgment if the borrower signs a deed in lieu. Unless stipulated in the settlement agreement, the lender can pursue a deficiency judgment for the difference in the outstanding mortgage debt and the property's fair market value. It is recommended to seek legal advice from a real estate attorney and tax professional regarding deficiency judgment, deficiency balance, and any other tax liability that can arise from signing a deed in lieu of foreclosure. A borrower may be eligible to get a Fannie Mae mortgage after only two years after filing a deed in lieu.
Reasons A Lender Might Accept A Deed In Lieu
Though lenders are not obligated to accept a deed in lieu of foreclosure, they have some incentives. Among the benefits your lender receives when they take a deed in lieu are:
To gain control over your property, lenders must hire attorneys to go to court, prove your insolvency, and get court approval to take your property in foreclosure. Even if they've already been to court, your lender must legally evict you from the property in some states. Therefore, it saves both time and money for your lender to accept a deed in lieu of foreclosure.
The condition of a property is also an essential factor for lenders. If the lender comes to an agreement with the property owner, it makes for a less adversarial relationship. This alliance results in fewer houses getting vandalized by spiteful borrowers when they leave the property. When the property owner leaves the house in good shape, it will sell for more money and spend less time on the market. The subject property is in good condition, which allows the bank to realize a higher sale price for the subject property. Borrowers are usually required to maintain the property in good condition with a deed in lieu.
Deed In Lieu Vs. Foreclosure: What's The Difference?
A deed in lieu is usually less damaging to your credit than a foreclosure. In contrast to a foreclosure, a deed in lieu agreement won't affect your credit score for as long. A deed in lieu usually remains on your credit report for four years, while a foreclosure remains on your credit report for seven years. You should consider either a loan modification or a short sale before considering a deed in lieu. Both have less impact on your credit and future mortgage prospects. Some mortgage companies will require a cash contribution from the borrower before completing a deed in lieu. Deeds-in-lieu of foreclosure is only accepted if the mortgage company agrees to take them; the mortgage company is under no obligation to accept them. Like short sales, borrowers can be sued for a deficiency judgment in the event of foreclosure if the home sells for less than what is owed.
A loan modification is the first option to look at. Temporary or permanent loan modifications are available. Suppose the borrower has a temporary financial hardship. In that case, you may be able to develop a repayment plan with your lender or apply for a mortgage forbearance where your delinquent mortgage payments defer to the back end of your loan for repayment at a later date. There are two ways loan modifications can be beneficial to the borrower. One benefit of applying for a loan modification is the bank may lower your interest rate. A lower interest rate may bring a borrower's monthly payment back into a range they can afford every month. Another benefit of a loan modification is the bank may extend the length of your loan. If the lender gives the mortgage holder more time to pay off the loan, the monthly payments will decrease because the mortgage can amortize over a more extended period of time. A loan modification may hurt a borrower's credit if the lender reports a debt settlement agreement has been reached. To determine if you're a reasonable credit risk, Fannie Mae and Freddie Mac will review a potential borrower's income, loan documents, and past credit history to see if they have had a loan modification in the past.
The process of a short sale is when a homeowner works with a lender to sell a property for less than the balance owed on the mortgage. A short sale is an excellent alternative to facing foreclosure actions from the mortgage company. In addition, some lenders will offer relocation assistance to help homeowners find a new place to live as part of the short sale.
In a short sale agreement, the lender usually pays the closing costs. As a result, you will see a drastic hit on your credit score after completing a short sale. The biggest hit to your credit doesn't come from the short sale itself but all of the months of missed mortgage payments. Most short sales occur because property values have gone down in your area. A short sale resembles a traditional home sale, except your mortgage company needs to approve the short sale before the sale can take place. Short sales are still considered a better option for borrowers facing a hardship than a foreclosure. Banks request bank statements, tax returns, pay stubs, and a hardship letter from the property owner when applying for a short sale.
Some borrowers choose to file for bankruptcy to delay foreclosure actions from their lenders. Bankruptcy is a legal process involving someone or a business that cannot repay their outstanding debts. A bankruptcy filing is usually started by a petition filed by the debtor but can also be filed by creditors. Borrowers have been known to file bankruptcy to stop a foreclosure sale. Borrowers still face personal liability in bankruptcy. Valuation is given to all of the debtor's assets to evaluate if the assets may be used to repay part of the outstanding debt. Most mortgage companies will not grant a deed in lieu to borrowers in bankruptcy. It is essential to contact a bankruptcy attorney when filing for bankruptcy.