What is a deed in lieu of foreclosure?

Another option to consider when facing foreclosure is offering a deed in lieu of foreclosure to your home lender.

A deed in lieu of foreclosure is a voluntary conveyance by the borrower of the borrower's interest in real property to the lender to satisfy the borrower's default and avoid foreclosure.

To convey his or her interest in the real property secured by the mortgage loan, the borrower voluntarily executes a formal deed granting all of the borrower's interest in the real property secured by the loan to the lender.

In consideration of the borrower executing the deed in lieu of foreclosure, the lender may be willing to forgive any indebtedness remaining on the property and to provide additional benefits to the borrower such as moving expenses or additional time to vacate the property.

 How does a deed in lieu of foreclosure work?

A deed in lieu of foreclosure is a negotiated transaction in which the borrower (or a real estate attorney) proposes a settlement to his or her mortgage lender that will enable both the borrower and lender to avoid foreclosure.

However, your lender may require you to complete a questionnaire regarding your current financial situation and to provide documents such as tax returns, pay stubs and other documents to prove that you do not have the ability to make ongoing mortgage payments.

If you have determined that a deed in lieu of foreclosure is your best option to avoid foreclosure, the first thing to do is to contact your lender. Alternatively, you can retain an attorney experienced in negotiating a deed in lieu of foreclosure to represent you in the negotiations.

Be advised, a lender is not required to agree to a deed in lieu of foreclosure. Also, if there are junior liens on your property a lender is not likely to agree to the deed in lieu of foreclosure.

 Negotiating a deed in lieu of foreclosure

Depending on how far along you are in the foreclosure process, you may be saving the lender thousands in foreclosure costs in offering a deed in lieu of foreclosure.

Additionally, because you will not have to move out of the property until 20 days after the foreclosure sale, you may be costing yourself thousands in rent by voluntarily moving out of the property.

If you have only one mortgage and foreclosure has only recently begun (i.e. you have missed a couple mortgage payments or just received your Notice of Default), you are in an excellent bargaining position to negotiate a deed in lieu of foreclosure. However, if you have enough equity in the property to sell, a deed in lieu of foreclosure should only be utilized as a last resort.

Also, when negotiating a deed in lieu of foreclosure, it is important that your understanding with the lender is formalized in a settlement agreement that clearly sets out your agreement with the lender.

Do not rely on the verbal representations made by the lender as such representations are oftentimes made without the authority of those with the power to bind the lender to such an agreement.

 Advantages and disadvantages to a deed in lieu of foreclosure

The advantages of a deed in lieu of foreclosure include:

1. Saving your credit from a foreclosure reporting;

2. The waiver of a deficiency balance, if applicable and

3. Money for moving expenses, etc.

A foreclosure sale appears on your credit report for 7 years after the formal recording of the public auction of your property by the foreclosure trustee.

Given the current lending crisis, any negative credit reporting associated with a foreclosure can severely limit your ability to obtain a future mortgage.

By executing a deed in lieu of foreclosure, you avoid a foreclosure sale appearing on your credit report.

In the event a lender is legally capable of obtaining a deficiency judgment after a foreclosure sale, the deed in lieu of foreclosure may prevent the lender from pursuing a deficiency judgment against you.

However, the deficiency waiver is not automatic and must be negotiated with the lender and should be included in the settlement agreement entered into by and between the lender and borrower in connection with the deed in lieu of foreclosure.

Because the lender is saving thousands in foreclosure costs and other economic benefits by avoiding foreclosure, you may be able to receive money from the lender for moving expenses and other costs associated with your move.

While borrowers may not always consider the option of negotiating a payment from the lender, such an option is available and should be part of the deed in lieu of foreclosure negotiations.

The disadvantages of a deed in lieu of foreclosure include:

1. The payment of rent versus living in the home rent-free up until 20 days after the foreclosure sale;

2. Negative credit reporting related to the deed in lieu of foreclosure appearing on your credit report and

3. Possible income tax implications.

 More Information

To find out more about a deed in lieu of foreclosure, feel free to contact us with your questions. We can be reached by phone at: (206) 442-9500 (Toll-free: 1-800-206-6122).

To receive a free consultation regarding your (or your friend or family member’s) debt problems, please contact us today.