Sunday May 21, 2017

What is a Deed in Lieu?

When faced with foreclosure what is a deed in lieu?When faced with foreclosure, one of the alternatives you will probably hear mentioned is a deed in lieu.  A deed in lieu is similar to a short sale in that you agree to forfeit the home, and proceedings will immediately begin with the aim of selling the home.

The difference is who sells the home on the market.  In a short sale, it’s your job to find a buyer.  With a deed in lieu of a foreclosure, you transfer the home back to the lender immediately, and the lender is then responsible for finding a buyer.

What do you get out of a deed-in-lieu?

A deed-in-lieu may protect your credit to a limited degree; your credit will still take a hit, but a foreclosure would likely do far more damage.  So that’s a plus.

The lender will have to stop all foreclosure proceedings immediately.  Will your debt be forgiven?  This is up to the lender, so you will want to ask in advance whether you can be granted debt forgiveness. Another upside is that you will not have to manage the sales proceedings yourself, unlike with a short sale.

One possible drawback may be tax-related.  Technically if your loan is forgiven, your lender will have to file a 1099C on you—amazingly enough, the government considers this to be a form of “income.”

Check into the Mortgage Forgiveness Debt Relief Act of 2007 though; this act went into effect because so many people have been unable to afford to pay taxes on their forgiven debts.  The act applies to some loans forgiven between 2007 and 2012, so it may well apply to your predicament.

What properties may be eligible for a deed-in-lieu or short sale?

Your house must be on the market and for sale for at least 90 days (usually), and there can be no lien on your property.

You cannot be in foreclosure already, and your offer must be voluntary.  For a short sale you will have to be suffering an obvious hardship, and the price which you set (if you are managing the sale) must be considered reasonable under the lender’s guidelines and the current market climate.

If you are having difficulty getting a deed-in-lieu (or a short sale), you can try to get help from the Home Affordable Foreclosure Alternatives (HAFA) program, which streamlines the process for lenders and homeowners.

The alternative is of course foreclosure.  Foreclosure usually takes a worse toll on credit, but the main drawback is that you will not be eligible to purchase another house in the next seven years unless you do a deed-in-lieu or a short sale.

If you have no plans to do so though, you may actually get more time (and savings) out of a foreclosure.  This depends on whether or not your lender is willing to forgive your debt, which can vary.

There is no one perfect option for everyone, so you will have to consider the specifics of your situation and needs, and the willingness of your lender to comply with those needs.

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