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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, along with short sales, loan modifications, payment plans, and forbearances. Specifically, a deed in lieu is a transaction where the house owner willingly moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

In many cases, completing a deed in lieu will launch the customer from all obligations 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 bundle from the loan servicer (the company that manages the loan account). The application will need to be filled out and sent along with documentation about the borrower's income and expenditures including:

- proof of earnings (generally 2 current pay stubs or, if the customer is self-employed, a profit and loss statement).

recent tax returns.
a monetary declaration, detailing month-to-month income and expenditures.
bank statements (typically two recent statements for all accounts), and.
a hardship letter or hardship affidavit.

What Is a Hardship?
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A "hardship" is a scenario that is beyond the customer's control that leads to the debtor no longer being able to afford to make mortgage payments. Hardships that qualify for loss mitigation consideration include, for instance, job loss, minimized income, death of a partner, health problem, medical costs, divorce, rate of interest reset, and a natural disaster.

Sometimes, the bank will need the borrower to try to offer the home for its reasonable market worth 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 buy a title search.

The bank will typically just accept a deed in lieu of foreclosure on a first mortgage, implying there should be no extra liens-like 2nd mortgages, judgments from financial institutions, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the exact same bank holds both the first and the second mortgage on the home. Alternatively, a borrower 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 organize for a viewpoint (BPO) to figure out the reasonable market value of the residential or commercial property.

To finish the deed in lieu, the borrower 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 terms of the agreement in between the bank and the debtor and will consist of a provision that the debtor acted freely and voluntarily, not under browbeating or duress. This file may likewise consist of provisions dealing with whether the deal remains in complete complete satisfaction of the debt or whether the bank deserves to seek a deficiency judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

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

But if the bank wishes to maintain its right to look for a deficiency judgment, many jurisdictions permit the bank to do so by clearly specifying in the deal documents that a balance remains after the deed in lieu. The bank typically needs to define the amount of the deficiency and include this quantity in the deed in lieu documents or in a separate agreement.

Whether the bank can pursue a shortage judgment following a deed in lieu also in some cases depends on state law. Washington, for example, has at least one case that specifies a loan holder may not obtain a deficiency 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 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 might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is qualified for a deed in lieu has 3 alternatives after finishing the transaction:

- moving out of the home instantly.
participating in a three-month transition lease without any lease payment needed, or.
participating in a twelve-month lease and paying lease at market rate.

To learn more on requirements and how to engage in the program, go here.

Similarly, if Freddie Mac owns your loan, you may be qualified for an unique deed in lieu program, which might consist of relocation assistance.

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 prevents a bank from getting a deficiency 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 liable for a deficiency.

Generally, it may 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 money as part of the deal, or you receive additional 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 specific circumstance, talk to a regional foreclosure legal representative.

Also, you should take into consideration the length of time it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will purchase loans made 2 years after a deed in lieu if there are extenuating scenarios, like divorce, medical bills, or a task layoff that caused you economic problem, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting period for a Fannie Mae loan is 7 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 same, usually making it's mortgage insurance readily available after 3 years.

When to Seek Counsel

If you require aid comprehending the deed in lieu process or interpreting the files you'll be required to sign, you should consider seeking advice from a qualified lawyer. A lawyer can also assist you negotiate a release of your personal liability or a minimized shortage if required.
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