A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, in addition to short sales, loan adjustments, payment plans, and forbearances. Specifically, a deed in lieu is a deal where the property 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 a lot of cases, 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 first action in acquiring a deed in lieu is for the borrower to ask for a loss mitigation package from the loan servicer (the company that manages the loan account). The application will need to be submitted and sent along with documents about the debtor's income and expenses consisting of:

- proof of income (usually 2 recent pay stubs or, if the debtor is self-employed, a revenue and loss declaration).
- current tax returns.
- a financial declaration, detailing regular monthly earnings and expenses.
- bank statements (usually 2 recent statements for all accounts), and.
- a challenge letter or challenge affidavit.

What Is a Hardship?

A "difficulty" is a scenario that is beyond the debtor's control that results in the debtor no longer being able to pay for to make mortgage payments. Hardships that receive loss mitigation factor to consider consist of, for instance, job loss, lowered earnings, death of a partner, health problem, medical expenses, divorce, rate of interest reset, and a natural disaster.

Sometimes, the bank will require the debtor to attempt to sell the home for its reasonable market value before it will think about accepting a deed in lieu. Once the listing period expires, presuming the residential or commercial property hasn't sold, the servicer will order a title search.

The bank will typically just accept a deed in lieu of foreclosure on a first mortgage, suggesting there need to be no additional liens-like second mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the exact same bank holds both the first and the second mortgage on the home. Alternatively, a debtor can pick to pay off 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 schedule a brokers rate viewpoint (BPO) to identify the fair market worth of the residential or commercial property.

To complete the deed in lieu, the borrower 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 arrangement in between the bank and the borrower and will include a provision that the customer acted freely and willingly, not under browbeating or duress. This file may likewise consist of provisions dealing with whether the transaction is in full complete satisfaction of the financial obligation or whether the bank deserves to look for a shortage judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is often structured so that the deal pleases the mortgage debt. So, with the majority of deeds in lieu, the bank can't get a shortage judgment for the difference in between the home's fair market price and the debt.

But if the bank wishes to preserve its right to seek a shortage judgment, many jurisdictions permit the bank to do so by plainly mentioning in the transaction documents that a balance stays after the deed in lieu. The bank generally needs to specify the quantity of the shortage and include this amount in the deed in lieu files or in a different agreement.

Whether the bank can pursue a deficiency judgment following a deed in lieu likewise often depends on state law. Washington, for instance, has at least one case that mentions a loan holder might not get a deficiency judgment after a deed in lieu, even if the consideration 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 since the deed in lieu was successfully a nonjudicial foreclosure, the customer was entitled to defense under Washington's anti-deficiency laws.

Mortgage Release Program Under Fannie Mae

If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is qualified for a deed in lieu has three alternatives after finishing the transaction:

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

To find out more on requirements and how to take part in the program, go here.

Similarly, if Freddie Mac owns your loan, you may be eligible for a special deed in lieu program, which may consist of relocation support.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a deficiency judgment versus a homeowner as part of a foreclosure or after that by submitting a separate suit. In other states, state law prevents a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a shortage judgment versus you after a foreclosure, you might be better off letting a foreclosure occur rather than doing a deed in lieu of foreclosure that leaves you accountable for a shortage.

Generally, it might not deserve doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or decrease the shortage, you get some cash as part of the deal, 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 particular guidance about what to do in your particular scenario, speak to a local foreclosure lawyer.

Also, you ought to consider how long it will require to get a brand-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 situations, like divorce, medical expenses, or a task layoff that caused you financial difficulty, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting duration for a Fannie Mae loan is seven 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, 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 documents you'll be required to sign, you should consider talking to a qualified lawyer. An attorney can likewise assist you work out a release of your individual liability or a minimized shortage if needed.