A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, along with brief sales, loan adjustments, payment strategies, 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 the majority of cases, completing a deed in lieu will release the debtor from all commitments 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 initial step in getting a deed in lieu is for the debtor to ask for a loss mitigation package from the loan servicer (the business that manages the loan account). The application will require to be completed and submitted in addition to paperwork about the borrower's income and costs consisting of:
- evidence of income (typically two current pay stubs or, if the debtor is self-employed, a revenue and loss statement).
- current income tax return.
- a monetary declaration, detailing regular monthly earnings and costs.
- bank statements (usually 2 recent statements for all accounts), and.
- a challenge letter or hardship affidavit.
What Is a Challenge?
A "challenge" is a situation that is beyond the debtor's control that results in the debtor no longer having the ability to pay for to make mortgage payments. Hardships that get approved for loss mitigation factor to consider include, for instance, task loss, decreased earnings, death of a spouse, illness, medical expenditures, divorce, rates of interest reset, and a natural catastrophe.
Sometimes, the bank will need the debtor to attempt to sell the home for its reasonable market price before it will think about accepting a deed in lieu. Once the listing period expires, presuming the residential or commercial property hasn't sold, the servicer will purchase a title search.
The bank will normally only accept a deed in lieu of foreclosure on a very first mortgage, meaning there should be no additional liens-like 2nd mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the very same bank holds both the very first and the second mortgage on the home. Alternatively, a customer can select to settle any additional liens, such as a tax lien or judgment, to facilitate the deed in lieu deal. If and when the title is clear, then the servicer will arrange for a brokers rate viewpoint (BPO) to figure out the fair market price of the residential or commercial property.
To finish the deed in lieu, the debtor will be required to sign a grant deed in lieu of foreclosure, which is the document that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the terms of the arrangement between the bank and the customer and will consist of an arrangement that the customer acted easily and voluntarily, not under browbeating or duress. This document might also include provisions resolving whether the transaction is in complete satisfaction of the debt or whether the bank deserves to seek a shortage judgment.
Deficiency Judgments Following a Deed in Lieu of Foreclosure
A deed in lieu is frequently structured so that the transaction pleases the mortgage debt. So, with the majority of deeds in lieu, the bank can't get a deficiency judgment for the distinction between the home's fair market price and the financial obligation.
But if the bank wants to protect its right to seek a shortage judgment, most jurisdictions permit the bank to do so by plainly stating in the deal documents that a balance stays after the deed in lieu. The bank generally needs to specify the quantity of the deficiency and include this amount in the deed in lieu documents or in a separate arrangement.
Whether the bank can pursue a deficiency judgment following a deed in lieu likewise sometimes depends on state law. Washington, for instance, has at least one case that mentions a loan holder might not acquire a shortage 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 since the deed in lieu was successfully a nonjudicial foreclosure, the borrower was entitled to defense 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 borrower who is qualified for a deed in lieu has 3 options after finishing the transaction:
- moving out of the home right away.
- participating in a three-month shift lease with no rent payment needed, or.
- participating in a twelve-month lease and paying lease at market rate.
For additional information on requirements and how to partake in the program, go here.
Similarly, if Freddie Mac owns your loan, you might be eligible for a special deed in lieu program, which may consist of moving help.
Should You Consider Letting the Foreclosure Happen?
In some states, a bank can get a deficiency judgment versus a house owner as part of a foreclosure or after that by filing a separate claim. In other states, state law prevents a bank from getting a shortage judgment following a foreclosure. If the bank can't get a deficiency judgment against you after a foreclosure, you might be much better off letting a foreclosure take place rather than doing a deed in lieu of foreclosure that leaves you responsible for a deficiency.
Generally, it might not deserve doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or minimize the deficiency, you get some cash as part of the transaction, or you get additional time to stay in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific recommendations about what to do in your specific scenario, talk with a regional foreclosure legal representative.
Also, you should consider 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 two years after a deed in lieu if there are extenuating situations, like divorce, medical expenses, or a task layoff that triggered you economic problem, 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 4 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, normally making it's mortgage insurance readily available after three years.
When to Seek Counsel
If you require help understanding the deed in lieu process or interpreting the files you'll be required to sign, you ought to think about seeking advice from a qualified attorney. An attorney can also help you work out a release of your personal liability or a decreased shortage if needed.
