A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, in addition to short sales, loan adjustments, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the house owner 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.

For the most part, finishing a deed in lieu will launch the customer from all obligations 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 customer to request a loss mitigation bundle from the loan servicer (the business that manages the loan account). The application will require to be completed and sent in addition to paperwork about the borrower's earnings and costs including:

- proof of earnings (normally 2 current pay stubs or, if the customer is self-employed, an earnings and loss declaration).
- recent income tax return.
- a monetary statement, detailing monthly earnings and expenses.
- bank declarations (typically 2 current declarations for all accounts), and.
- a difficulty letter or hardship affidavit.

What Is a Difficulty?

A "difficulty" is a scenario that is beyond the debtor's control that results in the debtor no longer being able to manage to make mortgage payments. Hardships that receive loss mitigation factor to consider consist of, for example, task loss, lowered earnings, death of a spouse, health problem, medical expenditures, divorce, rate of interest reset, and a natural catastrophe.

Sometimes, the bank will require the customer to attempt to offer the home for its fair 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 buy a title search.

The bank will generally just accept a deed in lieu of foreclosure on a very first mortgage, meaning there must be no extra liens-like second mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic rule is if the very same bank holds both the first and the second mortgage on the home. Alternatively, a customer can pick to settle 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 rate opinion (BPO) to figure out the reasonable market price of the residential or commercial property.

To finish the deed in lieu, the debtor will be required to sign a grant deed in lieu of foreclosure, which is the file 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 agreement between the bank and the debtor and will include a provision that the customer acted easily and voluntarily, not under coercion or duress. This document might also include provisions resolving whether the deal remains in full satisfaction of the debt or whether the bank deserves to seek a deficiency judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is typically structured so that the deal pleases the mortgage financial obligation. So, with most deeds in lieu, the bank can't get a shortage judgment for the difference between the home's fair market worth and the debt.

But if the bank wishes to maintain its right to look for a deficiency judgment, the majority of jurisdictions allow the bank to do so by plainly stating in the transaction files that a balance stays after the deed in lieu. The bank normally needs to define the amount of the deficiency and include this quantity in the deed in lieu documents or in a different contract.

Whether the bank can pursue a deficiency judgment following a deed in lieu likewise often depends upon state law. Washington, for example, has at least one case that specifies a loan holder might not obtain a shortage judgment after a deed in lieu, even if the consideration is less than a full discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that due to the fact that the deed in lieu was successfully a nonjudicial foreclosure, the borrower was entitled to protection 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 customer who is qualified for a deed in lieu has 3 choices after completing the deal:

- moving out of the home immediately.
- participating in a three-month transition lease without any lease payment needed, or.
- participating in a twelve-month lease and paying lease at market rate.

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

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

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a shortage judgment against a homeowner as part of a foreclosure or after that by filing a separate claim. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a shortage judgment against you after a foreclosure, you may be much better off letting a foreclosure happen instead of doing a deed in lieu of foreclosure that leaves you responsible 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 minimize the shortage, you get some cash 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 guidance about what to do in your particular circumstance, speak to a local foreclosure attorney.

Also, you must think about the length of time it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for circumstances, will purchase loans made two years after a deed in lieu if there are extenuating scenarios, like divorce, medical costs, or a job layoff that triggered you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting period for a Fannie Mae loan is 7 years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, brief sales, and deeds in lieu the exact same, usually making it's mortgage insurance available after three years.

When to Seek Counsel

If you require aid comprehending the deed in lieu process or interpreting the documents you'll be needed to sign, you should think about talking to a certified attorney. A lawyer can also assist you negotiate a release of your personal liability or a minimized shortage if required.