Friday, October 19, 2012

What is a Deed In Lieu of Foreclosure?

Many people have heard the term “Deed in Lieu of foreclosure” or “Deed in Lieu” for short.  A quick polling would most likely reveal that the majority of people think that a deed in lieu simply means that you turn over the deed to your house to your lender and the lender goes away.  In short, those people would be correct to a certain extent.  However, a deed in lieu situation has multiple parts to it that require the advice and services of a real estate attorney.  If not handled correctly, the deed in lieu will not accomplish the goal of eliminating your financial liability in relation to your property.

Why the Deed in Lieu Option?

The deed in lieu should be considered for individuals who:
·      Are behind on mortgage payments
·      Owe more on the home than it is worth
·      Are facing a long-term hardship (a “hardship” must be proven)
·      Are unable to sell their home
·      Can no longer make mortgage payments
·      Are unable to refinance

Who is Eligible and how does a Deed in Lieu Work?

Not everyone can go through the deed in lieu process.  The lender must qualify you through some eligibility process.  The lender’s qualification process involves them determining the value of the property versus the amount you still owe.  The lender will also review your situation to analyze the “hardship” that you claim has led to you seeking a deed in lieu.  The lender might require you to put the property on the market for a period of time before accepting a deed in lieu.  If you can short sale your home, then lenders would prefer to go that route.   If you are unable to sell the home and you meet the lender’s qualifications, then you must vacate the home and leave the home in good condition.  Different lenders and areas have different expected time periods for completion of the deed in lieu process, but many say that 90 days is about the average.   Do not be surprised if your case takes longer or shorter than 90 days.

What are the Advantages to a Deed in Lieu?

The deed in lieu offers many attractive advantages as opposed to foreclosure.
·      Avoid the negative impact on your credit that a foreclosure would cause
·      Begin repairing your credit more quickly than you would after foreclosure
·      Completely eliminate or reduce your mortgage debt
·      Potentially qualify for relocation assistance through certain lender programs
·      Avoid handling the sale of your property; hand over the deed and the lender takes over
·      May qualify for a Fannie Mae mortgage sooner than if you went through foreclosure

What are the Disadvantages to a Deed in Lieu?
There are some disadvantages to this process for you to consider.  Lenders might not be willing to accept a deed in lieu.  Many lenders might already be sitting on piles of real estate where they would rather have cash.  The last thing they want is another distressed property to try and deal with.  You may not qualify for a deed in lieu if you have a home equity loan, multiple mortgages or certain liens against your property.   You will take a hit to your credit score so you have to be prepared for that.   You may also be forced to pay taxes on the amount of the deficiency that was wiped away by the deed in lieu.  The Mortgage Debt Relief Act of 2007 addresses this problem for now by giving tax exemptions up to a certain amount for qualified individuals, but this might not last.

As with any situation dealing with distressed property, you should consult with an attorney experienced in dealing with short sales, foreclosures and other real estate transactions so you are fully aware of the impact the deed in lieu will have on your financial well being.

See Our Related Blog Posts:
Bank of America Pays for Short Sales
The Anatomy of a Foreclosure

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