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 transaction where the property owner willingly transfers 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 debtor from all obligations 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 primary step in getting a deed in lieu is for the borrower to request a loss mitigation package from the loan servicer (the business that handles the loan account). The application will need to be completed and sent in addition to documents about the borrower's earnings and expenses including:

- evidence of earnings (usually 2 recent pay stubs or, if the customer is self-employed, a profit and loss declaration).
- recent income tax return.
- a financial declaration, detailing monthly earnings and expenditures.
- bank declarations (typically two current declarations for all accounts), and.
- a difficulty letter or hardship affidavit.

What Is a Difficulty?

A "difficulty" is a situation that is beyond the customer's control that results in the borrower no longer having the ability to pay for to make mortgage payments. Hardships that receive loss mitigation consideration consist of, for instance, job loss, reduced income, death of a partner, disease, medical expenditures, divorce, rates of interest reset, and a natural disaster.

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

The bank will typically just accept a deed in lieu of foreclosure on a very first mortgage, suggesting there must be no additional liens-like 2nd mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic 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 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 arrange for a brokers price opinion (BPO) to determine the reasonable 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 transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the agreement between the bank and the customer and will consist of a provision that the debtor acted freely and willingly, not under browbeating or duress. This file might also consist of arrangements dealing with whether the transaction remains in complete fulfillment of the financial obligation or whether the bank deserves to look for a deficiency judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is frequently structured so that the deal satisfies the mortgage financial obligation. So, with a lot of deeds in lieu, the bank can't get a shortage judgment for the distinction between the home's reasonable market value and the debt.

But if the bank wants to maintain its right to seek a shortage judgment, a lot of jurisdictions allow the bank to do so by clearly mentioning in the transaction documents that a balance stays after the deed in lieu. The bank normally requires to specify the quantity of the deficiency and include this amount in the deed in lieu files or in a separate agreement.

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 might 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 because the deed in lieu was effectively a nonjudicial foreclosure, the customer 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 eligible for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is eligible for a deed in lieu has 3 alternatives after finishing the transaction:

- vacating the home immediately.
- participating in a three-month transition lease with no lease payment required, or.
- entering into 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 qualified for a special deed in lieu program, which might include moving support.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a shortage judgment versus a property owner as part of a foreclosure or after that by filing a different lawsuit. 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 versus you after a foreclosure, you might be much better off letting a foreclosure occur instead of doing a deed in lieu of foreclosure that leaves you accountable for a shortage.

Generally, it may not deserve doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or reduce the shortage, you get some money as part of the transaction, or you receive additional time to remain 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 specific situation, speak to a local foreclosure lawyer.

Also, you need to consider for how long it will take 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 situations, like divorce, medical expenses, or a task layoff that triggered you financial trouble, 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 four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the very same, usually making it's mortgage insurance coverage readily available after three years.

When to Seek Counsel

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