A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, together with short sales, loan adjustments, payment plans, and forbearances. Specifically, a deed in lieu is a deal where the homeowner voluntarily transfers title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

Most of the times, finishing a deed in lieu will launch the borrower from all commitments and liability under the mortgage agreement and promissory note.

How Does a Deed in Lieu of Foreclosure Work?

Deficiency Judgments Following a Deed in Lieu of Foreclosure

Mortgage Release Program Under Fannie Mae

Should You Consider Letting the Foreclosure Happen?

When to Seek Counsel


How Does a Deed in Lieu of Foreclosure Work?

The very first step in getting a deed in lieu is for the borrower to ask for a loss mitigation package from the loan servicer (the company that handles the loan account). The application will require to be filled out and submitted together with paperwork about the customer's income and costs including:

- proof of income (generally 2 recent pay stubs or, if the borrower is self-employed, a profit and loss declaration).
- current income tax return.
- a financial declaration, detailing month-to-month income and costs.
- bank declarations (normally two recent declarations for all accounts), and.
- a hardship letter or challenge affidavit.

What Is a Difficulty?

A "challenge" is a circumstance that is beyond the borrower's control that results in the borrower no longer having the ability to pay for to make mortgage payments. Hardships that get approved for loss mitigation consideration include, for example, job loss, decreased income, death of a spouse, illness, medical expenses, divorce, rate of interest reset, and a natural disaster.

Sometimes, the bank will require the borrower to attempt to offer the home for its reasonable market worth before it will think about accepting a deed in lieu. Once the listing duration ends, assuming the residential or commercial property hasn't sold, the servicer will order a title search.

The bank will generally just accept a deed in lieu of foreclosure on a very first mortgage, indicating there must be no additional liens-like second mortgages, judgments from financial institutions, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the very same bank holds both the very first and the 2nd mortgage on the home. Alternatively, a customer can choose to settle any extra liens, such as a tax lien or judgment, to assist in the deed in lieu deal. If and when the title is clear, then the servicer will set up for a brokers cost viewpoint (BPO) to figure out the reasonable market worth of the residential or commercial property.

To complete the deed in lieu, the customer will be needed to sign a grant deed in lieu of foreclosure, which is the document that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the terms of the arrangement in between the bank and the customer and will consist of a provision that the customer acted freely and voluntarily, not under coercion or duress. This document might also consist of provisions resolving whether the transaction remains in complete satisfaction of the debt or whether the bank can look for a shortage judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is typically structured so that the transaction satisfies the mortgage financial obligation. So, with most deeds in lieu, the bank can't get a deficiency judgment for the distinction between the home's fair market price and the financial obligation.

But if the bank desires to protect its right to seek a deficiency judgment, the majority of jurisdictions permit the bank to do so by plainly mentioning in the deal files that a balance remains after the deed in lieu. The bank generally requires to specify the amount of the deficiency and include this quantity in the deed in lieu files or in a separate agreement.

Whether the bank can pursue a shortage judgment following a deed in lieu likewise in some cases depends on state law. Washington, for instance, has at least one case that mentions a loan holder may not obtain a shortage judgment after a deed in lieu, even if the factor to consider is less than a full discharge of the debt. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was successfully a nonjudicial foreclosure, the debtor was entitled to security under Washington's anti-deficiency laws.

Mortgage Release Program Under Fannie Mae

If Fannie Mae owns your mortgage loan, you may be eligible for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is qualified for a deed in lieu has 3 options after completing the deal:

- vacating the home right away.
- entering into a three-month transition lease with no lease payment required, or.
- participating in a twelve-month lease and paying lease at market rate.

For more details on requirements and how to partake in the program, go here.

Similarly, if Freddie Mac owns your loan, you might be qualified for a special deed in lieu program, which might include moving support.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a shortage judgment versus a property owner as part of a foreclosure or after that by filing a separate lawsuit. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a deficiency judgment against you after a foreclosure, you may be better off letting a foreclosure happen rather than doing a deed in lieu of foreclosure that leaves you liable for a shortage.

Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or lower the deficiency, you get some cash as part of the transaction, or you get extra time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific recommendations about what to do in your specific situation, talk with a local foreclosure attorney.

Also, you ought to consider the length of time it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will buy loans made 2 years after a deed in lieu if there are extenuating scenarios, like divorce, medical costs, or a task layoff that triggered you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting duration for a Fannie Mae loan is seven years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, short sales, and deeds in lieu the same, normally making it's mortgage insurance coverage offered after three years.

When to Seek Counsel

If you need assistance understanding the deed in lieu procedure or analyzing the files you'll be required to sign, you must consider speaking with a qualified attorney. An attorney can also help you negotiate a release of your individual liability or a lowered shortage if necessary.