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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, together with 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.

In most cases, finishing a deed in lieu will launch the debtor from all obligations and liability under the mortgage agreement and promissory note.
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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 initial step in acquiring a deed in lieu is for the borrower to request a loss mitigation bundle from the loan servicer (the business that manages the loan account). The application will require to be submitted and sent together with documents about the customer's earnings and costs including:

- proof of income (typically 2 recent pay stubs or, if the borrower is self-employed, a revenue and loss statement).

current income tax return.
a monetary declaration, detailing monthly earnings and expenses.
bank statements (typically two current declarations for all accounts), and.
a hardship letter or hardship affidavit.

What Is a Challenge?

A "difficulty" is a scenario that is beyond the borrower's control that leads to the debtor no longer being able to pay for to make mortgage payments. Hardships that get approved for loss mitigation factor to consider include, for instance, task loss, reduced earnings, death of a partner, disease, medical expenditures, divorce, rates of interest reset, and a natural disaster.

Sometimes, the bank will need the debtor to attempt to sell the home for its fair market price before it will consider accepting a deed in lieu. Once the listing period ends, assuming the residential or commercial property hasn't offered, the servicer will buy a title search.

The bank will typically just accept a deed in lieu of foreclosure on a very first mortgage, there should be no additional liens-like 2nd mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this general rule is if the exact same bank holds both the very first and the 2nd mortgage on the home. Alternatively, a customer can select to settle any extra liens, such as a tax lien or judgment, to assist in the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers price viewpoint (BPO) to figure out the fair market price of the residential or commercial property.

To finish the deed in lieu, the debtor will be needed to sign a grant deed in lieu of foreclosure, which is the document that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the terms of the contract between the bank and the borrower and will consist of an arrangement that the borrower acted freely and voluntarily, not under coercion or duress. This document may also include provisions attending to whether the deal is in complete fulfillment of the financial obligation 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 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 worth and the financial obligation.

But if the bank desires to maintain its right to seek a deficiency judgment, a lot of jurisdictions allow the bank to do so by clearly specifying in the transaction documents that a balance remains after the deed in lieu. The bank typically requires to specify the quantity of the deficiency and include this amount in the deed in lieu documents or in a different agreement.

Whether the bank can pursue a deficiency judgment following a deed in lieu also often depends on state law. Washington, for example, has at least one case that mentions a loan holder may not obtain a shortage 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 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 might be qualified for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is eligible for a deed in lieu has 3 options after finishing the deal:

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

For additional information on requirements and how to engage 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 relocation support.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a shortage judgment against a property owner as part of a foreclosure or after that by filing a separate 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 versus you after a foreclosure, you might be better off letting a foreclosure happen instead of doing a deed in lieu of foreclosure that leaves you responsible 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 shortage, you get some money as part of the deal, or you receive extra time to stay in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For particular suggestions about what to do in your particular circumstance, talk with a local foreclosure attorney.

Also, you need to take into consideration how long it will require to get a 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 circumstances, like divorce, medical bills, or a task layoff that triggered you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting period 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) treats foreclosures, short sales, and deeds in lieu the exact same, generally making it's mortgage insurance coverage offered after 3 years.

When to Seek Counsel

If you need help understanding the deed in lieu process or translating the files you'll be required to sign, you ought to consider seeking advice from a certified lawyer. A lawyer can also assist you negotiate a release of your personal liability or a lowered deficiency if essential.