A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, together with short sales, loan modifications, payment strategies, and forbearances. Specifically, a deed in lieu is a transaction where the house owner willingly 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.

In many cases, completing a deed in lieu will launch the customer from all responsibilities and liability under the mortgage contract 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 primary step in acquiring a deed in lieu is for the borrower to request a loss mitigation plan from the loan servicer (the company that handles the loan account). The application will need to be submitted and submitted together with documentation about the customer's income and expenses consisting of:

- evidence of income (usually 2 recent pay stubs or, if the debtor is self-employed, a profit and loss statement).
- current tax returns.
- a monetary statement, detailing regular monthly earnings and costs.
- bank declarations (typically two recent statements for all accounts), and.
- a hardship letter or challenge affidavit.

What Is a Difficulty?

A "hardship" is a situation that is beyond the debtor's control that leads to the borrower no longer being able to pay for to make mortgage payments. Hardships that certify for loss mitigation consideration include, for instance, job loss, minimized earnings, death of a partner, health problem, medical costs, divorce, rate of interest reset, and a natural catastrophe.

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

The bank will generally only accept a deed in lieu of foreclosure on a first mortgage, indicating there need to be no additional liens-like 2nd mortgages, judgments from lenders, 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 borrower can select to pay off any additional liens, such as a tax lien or judgment, to facilitate the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers cost viewpoint (BPO) to figure out the fair market price of the residential or commercial property.

To finish the deed in lieu, the customer will be required to sign a grant deed in lieu of foreclosure, which is the document that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the contract in between the bank and the borrower and will include an arrangement that the debtor acted easily and voluntarily, not under browbeating or duress. This file might also consist of provisions dealing with whether the deal is in full complete satisfaction of the debt or whether the bank can seek a shortage judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is frequently structured so that the deal satisfies the mortgage financial obligation. So, with the majority of deeds in lieu, the bank can't get a deficiency judgment for the difference in between the home's reasonable market value and the financial obligation.

But if the bank wants to maintain its right to look for a deficiency judgment, most jurisdictions permit the bank to do so by clearly mentioning in the deal files that a balance stays after the deed in lieu. The bank normally needs to define the quantity of the deficiency and include this quantity in the deed in lieu documents or in a different contract.

Whether the bank can pursue a shortage judgment following a deed in lieu also sometimes depends upon state law. Washington, for example, has at least one case that specifies a loan holder may not acquire a deficiency judgment after a deed in lieu, even if the factor to consider is less than a complete discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was efficiently a nonjudicial foreclosure, the debtor was entitled to defense under Washington's anti-deficiency laws.

Mortgage Release Program Under Fannie Mae

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

- moving out of the home instantly.
- participating in a three-month transition lease with no lease payment required, or.
- entering into a twelve-month lease and paying rent 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 may be qualified for an unique deed in lieu program, which might consist of relocation assistance.

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 different lawsuit. In other states, state law prevents a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a deficiency judgment against you after a foreclosure, you may be much better off letting a foreclosure take place instead of doing a deed in lieu of foreclosure that leaves you liable for a deficiency.

Generally, it may not be worth doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or reduce the deficiency, you get some money as part of the deal, or you get additional time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific advice about what to do in your particular situation, speak to a local foreclosure attorney.

Also, you should take into account the length of time it will take to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will purchase loans made two years after a deed in lieu if there are extenuating scenarios, like divorce, medical costs, or a task layoff that triggered you financial difficulty, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting duration for a Fannie Mae loan is 7 years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the very same, typically making it's mortgage insurance coverage offered after 3 years.

When to Seek Counsel

If you need assistance comprehending the deed in lieu procedure or interpreting the files you'll be required to sign, you ought to think about seeking advice from a qualified attorney. A lawyer can likewise assist you work out a release of your personal liability or a lowered shortage if required.