If you’re a homeowner on the edge of foreclosure, you may have heard the phrase “deed in lieu.” A deed in lieu of foreclosure offers the mortgagor and the mortgagee a variety of benefits over foreclosing a home. Understanding the terms of a deed in lieu and when it’s in your best interest to use this tool is important for protecting your financial future. If it appears your home is on its way to foreclosure, here’s what you need to know.
Homeowners’ Options in Lieu of Foreclosure
Thousands of homeowners struggle to make their mortgage payments despite the real estate market improving in recent years. If you’re one such homeowner, you may feel overwhelmed and backed into a corner. There is good news, however, you may have more options for escaping your payment debt than you think.
A short sale is one option for homeowners about to foreclose. During a short sale, the homeowner and lender agree to sell the home for less than what the homeowner owes on the loan, avoiding foreclosure. Short sales involve a third-party who agrees to buy the home, giving the money to the lender in exchange for releasing the property lien. Short sales and deeds in lieu are similar, leading to some confusion between the two. However, there are important differences.
During a deed in lieu transaction, a third-party does not purchase the property. Instead, the homeowner transfers the property title to the lender in exchange for release from the mortgage obligation. The processes for obtaining a deed in lieu and executing a short sale are similar. Both processes begin with the homeowner requesting a loss mitigation package from the lender. This package requests certain information from the borrower, including details regarding monthly income, expenses, and a hardship letter.
In most deed in lieu of foreclosure agreements, the lender requires the homeowner to list the property for sale for at least 90 days before agreeing to accept a deed in lieu. The lender may request a copy of the home listing as proof. If the lender approves a deed in lieu, he or she will send the homeowner a deed to sign that transfers ownership of the property to the lender. The homeowner must also sign an estoppel affidavit, which sets the terms of the agreement. The estoppel affidavit states that you are transferring the title voluntarily and of your own free will.
Advantages of a Deed in Lieu
Conveying real property to the lender to satisfy a defaulted loan is more beneficial than a foreclosure for both parties involved. The main advantage is that the deed immediately releases the borrower from all or most of the debt related to the defaulted loan. The borrower can avoid a public foreclosure proceeding and enjoy less harm to his or her credit. The lender benefits from accepting a deed in lieu of foreclosure by reducing the amount of time of repossession.
A deed in lieu is less costly to the lender than a foreclosure and avoids the risk of “borrower revenge.” In some foreclosure situations, angry borrowers may vandalize the home before eviction. Accepting a deed in lieu mitigates this potential risk. If the borrower files for bankruptcy after a foreclosure, this causes additional problems for the lender. A deed in lieu escapes this issue.
A deed in lieu may be a less attractive option for a lender if the borrower has any junior liens. The lender will not want to take liability of the liens and may deny the request for a deed in lieu – opting instead for foreclosure to obtain a clean title. If the borrower’s outstanding indebtedness equals more than the fair value of the property in question, the lender may also deny a deed in lieu request. Understanding when a deed in lieu of foreclosure is your best option requires speaking to a knowledgeable real estate agent about your particular situation.
