Deed In Lieu of Foreclosure

If you wish to stop foreclosure on your home because you cannot keep up with the monthly payments then you may want to consider asking the mortgage company for a deed in lieu of foreclosure. Below we give you a complete breakdown on what it is and how it can help you.

How does a deed in lieu of foreclosure work?

If you're going to ask for a deed in lieu of foreclosure you are going to have to sign a couple of legal documents:

1. warranty deed, quick claim deed or a grant deed - this document conveys legal ownership of the property to the lender
2. agreement in lieu of a foreclosure - this document has the terms and conditions of the deed in lieu

The lender will mark the homeowner's note as paid and will then provide you with two forms:

1. A waiver of the right to a deficiency judgment (with this your lender will not be able to ask you to pay for any unpaid debts)
2. A form stating the homeowner's debt has been canceled

All deed in lieu of foreclosure's must be executed through an escrow company which will receive the homeowner's/borrower's note, marked as paid, from the lender.  Just as when you bought the house, ownership will be transferred, only this time it will be transferred from you back to the mortgage lender.

You will also be required by most lenders to put your home on the market for a period of no less than 30 days. Lenders will often do this because they lose more money by having to sell the property themselves then to have you sell it in a short sale.

With out exception, make sure any promises made by the lender are in writing

What is a Deed in Lieu a Foreclosure?

The deed in lieu of foreclosure is the process in which you give all rights to your property over to your mortgage lender or service.  In order for the lender to get back part or even all of the original loan amount they must sell off the property to payoff as much of the original loan balance as possible.

Is receiving a Loan Modification better than a Deed in Lieu?

This is a much better option over a deed in lieu, because you get to keep your home.  Although your credit is probably damaged by late mortgage payments the damage which has been done will be far less than if you chose a deed in lieu of foreclosure.

What is the difference between a Short Sale and a Deed in Lieu of Foreclosure?

In both processes the lender often loses money, but with a short sale the homeowner has found a buyer for the home at a price which is generally less than what the homeowner owes  on the note.

The lender/bank will almost certainly choose the short sale over the deed in lieu of foreclosure so it does not have to deal with the cost involved with selling the property itself.

What are the tax consequences to a Deed in Lieu of Foreclosure?

With the Mortgage Forgiveness Debt Relief act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.

Benefits to a Deed in Lieu of Foreclosure:

1. Deed in lieu of foreclosure will often reflect better on your credit report than a foreclosure or bankruptcy.
2. With the deed in lieu you do not need to take responsibility for selling your home (you may simply hand over the title to the lender and walk away).

Disadvantages to the Deed in Lieu a Foreclosure:

1. If you have second or third mortgages, you generally cannot get a deed in lieu.
2. If you have tax liens or home equity lines of credit against the property you often cannot get a deed in lieu.
3. Getting a lender to actually accept a deed in lieu can be very difficult.

Deed in Lieu of Foreclosure Facts

1. The owner must agree to a written agreement of property conditions.
2. If the deed in lieu follows a special failed forbearance agreement or the pre-foreclosure sale program, then the deed in lieu of foreclosure must be completed or foreclosure initiated within 90 days of the failure.
3. Mortgage lenders may determine that a "current" borrower is eligible for the deed in lieu of foreclosure auction.
4. Under no circumstances should the borrower be encouraged to default on their mortgage for the purpose of qualifying for this option.
5. Deed in lieu must be completed or foreclosure initiated within six months of the date of default.
6. Any compensation received by borrowers must be applied to junior liens placed on the mortgage property.
7. The mortgagee/lender can pay, the borrower up to $2000 in compensation .

Deed in Lieu Eligibility Factors

1. Lender will develop a written deed in lieu of foreclosure agreement, which will contain all of the conditions under which the deed will be accepted and must be signed by both the lender and the borrower/homeowner.
2. The homeowner/borrower must be at least 31 days delinquent at the time the deed in lieu warranty special deed is executed.
3. The property must be owner occupied. Exceptions: Job transfer, divorce, death or Job Loss and the subject property was not purchased as a rental investment or was used as a rental for a total of more than 12 months.