A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, along with short sales, loan adjustments, payment strategies, and forbearances. Specifically, a deed in lieu is a deal where the homeowner 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.

In many cases, finishing a deed in lieu will launch the debtor 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 initial step in obtaining a deed in lieu is for the borrower to request a loss mitigation bundle from the loan servicer (the company that handles the loan account). The application will require to be filled out and submitted along with paperwork about the debtor's earnings and expenditures consisting of:

- proof of earnings (normally two recent pay stubs or, if the debtor is self-employed, a profit and loss statement).
- recent tax returns.
- a monetary declaration, detailing monthly income and expenditures.
- bank declarations (normally two recent statements for all accounts), and.
- a hardship letter or hardship affidavit.

What Is a Challenge?

A "challenge" is a circumstance that is beyond the debtor's control that results in the customer no longer having the ability to afford to make mortgage payments. Hardships that get approved for loss mitigation factor to consider include, for example, job loss, lowered income, death of a spouse, illness, medical costs, divorce, rate of interest reset, and a natural catastrophe.

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

The bank will typically only accept a deed in lieu of foreclosure on a very first mortgage, implying there need to be no extra liens-like second mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this general guideline is if the same bank holds both the very first and the second mortgage on the home. Alternatively, a debtor can select 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 schedule a brokers price opinion (BPO) to determine 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 moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the agreement in between the bank and the borrower and will include a provision that the customer acted easily and willingly, not under coercion or pressure. This document may also consist of provisions resolving whether the transaction is in full complete satisfaction of the financial obligation or whether the bank can seek a deficiency judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is typically structured so that the transaction satisfies the mortgage financial obligation. So, with most deeds in lieu, the bank can't get a deficiency judgment for the difference in between the home's reasonable market value and the financial obligation.

But if the bank desires to maintain its right to look for a shortage judgment, most jurisdictions allow the bank to do so by clearly stating in the transaction documents that a balance stays after the deed in lieu. The bank normally needs to specify the quantity 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 also often depends upon state law. Washington, for example, has at least one case that mentions a loan holder might not acquire a shortage judgment after a deed in lieu, even if the consideration 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 due to the fact that the deed in lieu was efficiently a nonjudicial foreclosure, the debtor 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 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 completing the deal:

- moving out of the home immediately.
- getting in into a three-month shift lease with no rent payment needed, or.
- participating in a twelve-month lease and paying lease at market rate.

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

Similarly, if Freddie Mac owns your loan, you might be eligible for an unique deed in lieu program, which might include relocation assistance.

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 lawsuit. In other states, state law prevents 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 might be 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 agree to forgive or decrease 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 advice about what to do in your particular situation, talk with a regional foreclosure attorney.

Also, you should consider how long 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 circumstances, like divorce, medical expenses, or a job layoff that triggered you economic problem, 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 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 very same, usually making it's mortgage insurance offered after 3 years.

When to Seek Counsel

If you need assistance understanding the deed in lieu procedure or analyzing the files you'll be needed to sign, you should think about consulting with a qualified attorney. A lawyer can also assist you negotiate a release of your personal liability or a decreased shortage if necessary.