How a Deed in Lieu of Foreclosure Works

What does a deed in lieu of foreclosure entail? Find out if this is for you.

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Introduction

Buying a home is usually filled with happy thoughts about the future memories that will be made there and the life that will fill the walls. Many couples plan on laying roots in the community when they make this purchase. But no matter how much you plan out your life, it doesn’t always work out. Things can arise out of the blue that turns your plans upside down – such as a change in employment, a medical crisis, or even a natural disaster.

When these situations arise, you may find that paying your mortgage is just not possible anymore – and you could be facing the potential loss of your home.

Before it gets to that point, however, it is important to understand your options. This can help you to protect your credit, save your home, and protect your future. And talking to an attorney is a great place to start. In the meantime – let’s take a look at a deed in lieu of foreclosure and what it could mean for you.

Can’t Pay Your Mortgage? What Do You Do?

If you find yourself in a situation where you do not have enough funds to cover your mortgage, you may sit for a while to see if your ability to pay may change. For instance, if you are in the process of looking for a new home. Otherwise, you may find that selling your home is the next best option. Getting it on the market and sold can help you to pay off the outstanding mortgage and walk away from the property altogether. That is, of course, if you can sell the property and make enough to pay off the debt.

You may also want to consider a loan modification or a short sale. But there is no guarantee that the lender will go for either one. So, your last choice can be to give it back to the bank. This may be done through a foreclosure started by the lender or it may be able to be handled using a deed in lieu of foreclosure.

What is a Deed in Lieu of Foreclosure?

When faced with a foreclosure, you have options that can potentially save you from dealing with an actual foreclosure. The lender will deed the property back to themselves, releasing the homeowner from any and all obligations of the mortgage.

This is a voluntary agreement that can be sought by either the homeowner or the mortgager that will be signed, noticed, and recorded in public records. The lender takes back ownership of the property without having to go through the formal foreclosure process. It is a cost-effective, quick resolution for a distressed homeowner.

To get the process started, the lender often requires the homeowner to submit an application with proof of the current financial situation, though each company will be different.

Deed in Lieu of Foreclosure vs. A Foreclosure

Although a deed in lieu of foreclosure and an actual foreclosure may sound like they are the same thing, they are different. For instance, in a foreclosure, the bank takes back ownership of the property if the homeowner doesn’t make payments. Keep in mind that this may vary from state to state. In California, your home loan will be in default after 180 days and the process can begin.

So, what is the biggest difference? The impact on your credit score and your remaining financial responsibility after you lose the property.

With a deed in lieu of foreclosure, you are simply transferring the property between two parties. With a foreclosure, your credit score will be impacted and with it listed on the report for years to come it can be very damaging for any endeavors your future may hold. The former doesn’t make nearly as big of a negative impact as the latter.

Further, with a deed in lieu of foreclosure, once you sign the agreement and give up your rights to the property, you no longer have any financial responsibility for the property. The mortgage you had will be removed. On the other hand, a foreclosure may come with added costs and fees and could leave you owing what is left of the mortgage as well as legal fees and costs.

A few other key differences worth noting are:

• The time frame for a deed in lieu of foreclosure is much faster than a foreclosure – which means you move on to find a more affordable place to live sooner.
• Sometimes, deeds in lieu of foreclosure programs can give you assistance to get back on your feet and provide a smoother transition.
• And, a deed in lieu is more private than a foreclosure as it is just between you and your back and does not involve any courts or outside parties.

Will a Lender Always Agree to a Deed in Lieu?

While it may seem like an ideal option, it is important to note that a lender will not always agree to a deed in lieu of foreclosure – nor do they legally have to. So, what makes them choose to do so? Below are a few reasons why they may or may not accept your application:

A lender may accept a deed in lieu of foreclosure as it quickly gives them control over the property. They don’t have to go through the formal foreclosure process and, instead, can just take back ownership of the property.

Another reason they’d likely agree is that doing so means getting a property in good condition. And, ultimately, they can sell it for more money. The property condition is often a stipulation in the agreement you will sign.

What deters lenders from a deed in lieu? Believe it or not, there are a few reasons this situation could arise, including:

• The home is in bad shape.
• There are liens or judgments on the property.
• A depreciated home value.

Seek an Expert Opinion

If you are struggling and in need of help when it comes to your mortgage – seeking legal advice can be a great option. An attorney will help you navigate these unknown waters and be a positive force between you and the big banks. Plus, you will get all the information you need to determine if a deed in lieu of foreclosure is best for your situation.