A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, along 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 concurring not to pursue a foreclosure.

For the most part, 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 initial step in obtaining a deed in lieu is for the debtor to ask for a loss mitigation plan from the loan servicer (the business that handles the loan account). The application will need to be submitted and sent in addition to documents about the customer's earnings and expenses consisting of:

- proof of income (usually 2 current pay stubs or, if the borrower is self-employed, a profit and loss statement).
- current income tax return.
- a financial declaration, detailing monthly income and expenditures.
- bank statements (typically 2 recent declarations for all accounts), and.
- a challenge letter or difficulty affidavit.

What Is a Difficulty?

A "difficulty" is a scenario that is beyond the customer's control that results in the customer no longer having the ability to manage to make mortgage payments. Hardships that get approved for loss mitigation factor to consider include, for example, job loss, decreased earnings, death of a partner, disease, medical expenses, divorce, rate of interest reset, and a natural catastrophe.

Sometimes, the bank will need the customer to try to sell the home for its reasonable market price before it will think about accepting a deed in lieu. Once the listing duration expires, assuming the residential or commercial property hasn't offered, the servicer will buy a title search.

The bank will normally just accept a deed in lieu of foreclosure on a very first mortgage, indicating there should be no additional liens-like 2nd mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this general guideline is if the very same bank holds both the first and the second mortgage on the home. Alternatively, a borrower can pick to settle any extra liens, such as a tax lien or judgment, to facilitate the deed in lieu transaction. If and when the title is clear, then the servicer will arrange for a brokers price viewpoint (BPO) to determine the reasonable market worth of the residential or commercial property.

To complete 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 terms of the contract between the bank and the customer and will include a provision that the debtor acted easily and willingly, not under coercion or duress. This document might likewise consist of provisions dealing with whether the transaction remains in full satisfaction of the debt or whether the bank has the right to look for 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 the majority of deeds in lieu, the bank can't get a shortage judgment for the distinction in between the home's fair market worth and the debt.

But if the bank desires to preserve its right to look for a shortage judgment, many jurisdictions allow the bank to do so by plainly specifying in the deal documents that a balance stays after the deed in lieu. The bank normally requires to define the amount of the deficiency and include this amount in the deed in lieu files or in a different arrangement.

Whether the bank can pursue a shortage judgment following a deed in lieu likewise sometimes depends upon state law. Washington, for instance, has at least one case that states a loan holder may not obtain a deficiency judgment after a deed in lieu, even if the factor to consider 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 effectively 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 may be qualified for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is eligible for a deed in lieu has three alternatives after finishing the transaction:

- vacating the home instantly.
- participating in a three-month shift lease without any lease payment needed, or.
- getting in into a twelve-month lease and paying lease 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 qualified for a special deed in lieu program, which might include relocation support.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a deficiency judgment against a house owner as part of a foreclosure or after that by submitting a separate suit. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a deficiency judgment against you after a foreclosure, you might be better off letting a foreclosure take place rather than 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 consent to forgive or minimize the deficiency, you get some cash as part of the transaction, or you get 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 guidance about what to do in your particular situation, talk to a regional foreclosure legal representative.

Also, you must take into account the length of time it will require to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will purchase loans made two years after a deed in lieu if there are extenuating circumstances, like divorce, medical costs, or a task layoff that caused you financial problem, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, 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, short sales, and deeds in lieu the very same, usually making it's mortgage insurance available after 3 years.

When to Seek Counsel

If you require aid comprehending the deed in lieu procedure or analyzing the files you'll be required to sign, you need to think about speaking with a certified lawyer. An attorney can also help you work out a release of your individual liability or a reduced shortage if necessary.