A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, together with short sales, loan modifications, payment plans, and forbearances. Specifically, a deed in lieu is a transaction where the property owner voluntarily moves 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, completing a deed in lieu will release the customer from all responsibilities 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 primary step in obtaining a deed in lieu is for the customer to ask for a loss mitigation plan from the loan servicer (the business that manages the loan account). The application will require to be filled out and sent together with documents about the debtor's income and costs including:

- evidence of earnings (normally 2 current pay stubs or, if the debtor is self-employed, a profit and loss declaration).
- recent tax returns.
- a monetary declaration, detailing month-to-month income and expenditures.
- bank statements (usually two current statements for all accounts), and.
- a hardship letter or challenge affidavit.

What Is a Challenge?

A "hardship" is a situation that is beyond the debtor's control that leads to the customer no longer having the ability to pay for to make mortgage payments. Hardships that receive loss mitigation factor to consider consist of, for example, task loss, reduced income, death of a partner, health problem, medical expenses, divorce, interest rate reset, and a natural disaster.

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

The bank will normally only accept a deed in lieu of foreclosure on a very first mortgage, implying there must 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 same bank holds both the first and the second mortgage on the home. Alternatively, a debtor can pick to settle any additional liens, such as a tax lien or judgment, to help with 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 finish the deed in lieu, the customer will be needed 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 terms of the arrangement between the bank and the borrower and will include a provision that the borrower acted easily and willingly, not under browbeating or duress. This file may also consist of arrangements dealing with whether the deal remains in full fulfillment of the debt or whether the bank deserves to seek a shortage judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is frequently structured so that the transaction pleases the mortgage financial obligation. So, with a lot of 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 wishes to maintain its right to seek a shortage judgment, most jurisdictions permit the bank to do so by clearly stating in the transaction files that a balance stays after the deed in lieu. The bank typically needs to define the amount of the shortage and include this quantity in the deed in lieu documents or in a different agreement.

Whether the bank can pursue a shortage judgment following a deed in lieu likewise in some cases depends upon state law. Washington, for instance, has at least one case that specifies a loan holder might not obtain a shortage judgment after a deed in lieu, even if the factor to consider is less than a complete discharge of the debt. (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 security 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 customer who is eligible for a deed in lieu has three options after finishing the deal:

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

To find out more 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 consist of moving support.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a shortage judgment versus a homeowner as part of a foreclosure or after that by submitting a different lawsuit. In other states, state law avoids a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a shortage judgment against you after a foreclosure, you may be better off letting a foreclosure occur instead of doing a deed in lieu of foreclosure that leaves you accountable for a shortage.

Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or decrease the shortage, you get some cash as part of the transaction, 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 recommendations about what to do in your particular circumstance, talk to a regional foreclosure attorney.

Also, you must take into account for how long it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will buy loans made 2 years after a deed in lieu if there are extenuating scenarios, like divorce, medical costs, or a job layoff that triggered you economic trouble, 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, short sales, and deeds in lieu the exact same, normally making it's mortgage insurance coverage readily available after 3 years.

When to Seek Counsel

If you require assistance comprehending the deed in lieu process or interpreting the files you'll be needed to sign, you must consider seeking advice from a certified lawyer. A lawyer can likewise help you negotiate a release of your individual liability or a lowered deficiency if required.