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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, in addition to short sales, loan modifications, payment strategies, and forbearances. Specifically, a deed in lieu is a deal where the homeowner willingly 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.

In many cases, finishing a deed in lieu will release the borrower from all responsibilities and liability under the mortgage contract 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 primary step in obtaining a deed in lieu is for the customer to request a loss mitigation plan from the loan servicer (the company that handles the loan account). The application will require to be submitted and sent together with paperwork about the customer's income and costs consisting of:

- evidence of income (generally two current pay stubs or, if the customer is self-employed, an earnings and loss statement).

current income tax return.
a financial declaration, detailing month-to-month earnings and expenses.
bank declarations (usually 2 current declarations for all accounts), and.
a challenge letter or challenge affidavit.

What Is a Difficulty?

A "difficulty" is a scenario that is beyond the debtor's control that leads to the debtor no longer having the ability to manage to make mortgage payments. Hardships that get approved for loss mitigation factor to consider include, for instance, task loss, minimized earnings, death of a spouse, health problem, medical expenses, divorce, rates of interest reset, and a natural disaster.

Sometimes, the bank will need the debtor to try to offer the home for its fair market worth before it will consider accepting a deed in lieu. Once the listing duration ends, assuming the residential or commercial property hasn't offered, the servicer will order a title search.

The bank will just accept a deed in lieu of foreclosure on a first mortgage, implying there must be no additional liens-like 2nd 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 borrower can pick to pay off 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 organize for a brokers rate opinion (BPO) to identify the fair market price of the residential or commercial property.

To complete 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 agreement in between the bank and the borrower and will consist of a provision that the borrower acted easily and voluntarily, not under coercion or duress. This document might also include arrangements addressing whether the deal is in complete satisfaction of the debt 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 satisfies the mortgage debt. So, with a lot of deeds in lieu, the bank can't get a deficiency judgment for the difference between the home's reasonable market price and the debt.

But if the bank wishes to preserve its right to seek a deficiency judgment, the majority of jurisdictions allow the bank to do so by clearly specifying in the deal documents that a balance stays after the deed in lieu. The bank typically requires to define 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 upon state law. Washington, for instance, has at least one case that states a loan holder might not obtain a shortage judgment after a deed in lieu, even if the factor to consider is less than a complete discharge of the debt. (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 effectively a nonjudicial foreclosure, the borrower was entitled to protection 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 borrower who is qualified for a deed in lieu has 3 alternatives after finishing the deal:

- vacating the home immediately.
participating in a three-month shift lease without any lease payment required, or.
participating in 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 may consist of moving help.

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 different suit. In other states, state law avoids a bank from getting a shortage 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 take place instead of doing a deed in lieu of foreclosure that leaves you responsible for a shortage.

Generally, it may not be worth doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or reduce the deficiency, you get some cash as part of the transaction, 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 specific guidance about what to do in your particular situation, talk to a local foreclosure lawyer.

Also, you need to think about the length of time it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for circumstances, will buy loans made two years after a deed in lieu if there are extenuating situations, like divorce, medical bills, or a task layoff that caused you economic problem, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, the waiting period for a Fannie Mae loan is 7 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 same, generally making it's mortgage insurance coverage readily available after 3 years.

When to Seek Counsel

If you require aid understanding the deed in lieu process or translating the files you'll be needed to sign, you must consider talking to a certified attorney. A lawyer can likewise help you work out a release of your individual liability or a reduced shortage if required.