Deed in Lieu of Foreclosure

A deed in lieu and a foreclosure are contracts with entirely different purposes. Below are some of the features of each.

Deed in Lieu

A deed in lieu is an agreement between a borrower and lender to avoid foreclosure proceedings. It helps minimize the damage to a borrower’s credit rating when they can’t make monthly home payments.

Foreclosure

A formal foreclosure happens when a lender takes possession of a mortgaged property involuntarily. This occurs when the borrower falls behind on payments for an extended period. A foreclosure typically hurts a credit score for years.

• Reasons your lender may reject a request for a deed in lieu of foreclosure include:
• They may not know how to process a deed in lieu of foreclosure
• The loan you initially took out is backed by a government guarantee (in this case, a lender may require you to foreclose on your property instead)
• A lender may look at your property’s condition and value and choose to decline

A lender doesn’t have to accept your request for a deed in lieu, but one has an incentive to.

Some benefits for lenders include the following:

• Quicker control over a property with payment in arrears. Lenders don’t have to go to court to take your property with a deed in lieu.
• Better condition of the property. Many lenders receive properties with minimal damage when they agree to a deed in lieu, and some will even make property upkeep of the home a condition of the contract.

There are scenarios when you should and shouldn’t use a deed in lieu of foreclosure and several considerations when agreeing to this situation.

Ensure you understand all details of this contract before signing one.

When Would a Deed in Lieu of Foreclosure Be Used?

If you, as a borrower, contend with a looming foreclosure, you can work with your lender to use a deed. This kind of agreement allows you to escape the long-term effects of an unmitigated foreclosure.

That said, beware of consequences, like a reduction in your credit score and property loss.

How Does a Deed in Lieu of Foreclosure Work?

You need to demonstrate financial hardship or an inability to pay your mortgage if you want to utilize a deed in lieu of foreclosure. You can collaborate with your local bank or financial planner to compare your income against your expenses.

Once you have evidence of financial hardship on hand, present that evidence to your lender and ask about your right to a deed in lieu of foreclosure. Some lenders don’t make this option available to their borrowers.

If you get the go-ahead, you can legally sign the title to your property over to the lender. Once you’ve signed the deed, the lender will issue you a mortgage release. That mortgage release then represents your satisfaction of mortgage debts.

How to Use a Deed in Lieu of Foreclosure

A borrower isn’t the only party who can begin a conversation about a deed in lieu of foreclosure. If a lender wants to reclaim property or is otherwise sympathetic to the borrower’s plight, the lender may initiate these conversations.

When the two parties agree, the borrower presents to the lender an application for a deed in lieu of foreclosure along with evidence elaborating on their financial hardships.

The borrower needs to clarify in their paperwork that they are voluntarily entering into a deed in lieu of a foreclosure agreement, or else the contract may be void.

The borrower then waits for the lender to approve or deny their request for a deed in lieu of foreclosure.

If approved, the lender composes a letter outlining the nature of their agreement with the borrower. At this point, property transfer and debt cancellation can proceed.

Lenders and borrowers alike have complicated relationships with deeds in lieu of foreclosure. There are pros and cons to the use of this document for both parties.

Lenders: Pros and Cons

Lenders who accept a deed in lieu of foreclosure benefit from reclaiming a property they can sell to a different buyer. A deed in lieu of foreclosure also helps lenders avoid the repossession costs of a traditional foreclosure.

That said, lenders take on a significant financial burden when accepting a deed in lieu of foreclosure. This is particularly true if a borrower has junior (second mortgage) liens tied to the property. If the lender can’t sell the property in a reasonable amount of time, there may be more financial downsides to the deed in lieu of foreclosure than upsides.

Borrowers: Pros and Cons

The benefits of a deed in lieu of foreclosure lean heavily in the borrower’s favor. Borrowers can use deeds in lieu of foreclosure to overcome substantial mortgage debt.

What’s more, these deeds allow borrowers to avoid the foreclosure process, thus protecting their credit score and their time.

On the other hand, borrowers face severe losses as they transfer the property they’ve worked hard to develop over the years. The borrower’s credit score will still be negatively affected, although not as drastically as with foreclosure.

There’s also no way to guarantee that a lender will accept a deed in lieu of foreclosure.

Tip: if your credit score is already in trouble, consider pursuing a short sale or a modification to your lending agreement before requesting a deed instead of foreclosure.

When drafting a deed in lieu of a foreclosure agreement, the parties need to include information regarding the original mortgage and that the borrower will convey their property to the lender in satisfaction of the mortgage debt and in lieu of foreclosure.

Borrowers may need to include documents to support financial hardship, such as monthly budget and expenses, bank statements, tax returns, and proof of income or lack thereof.

Lenders may also request borrowers submit hardship affidavits alongside primary evidence of a financial struggle.

Tip: your hardship affidavit can detail your recent loss of income, increase in housing expenses, or a reduction in assets when highlighting your financial difficulties.

A deed in lieu of foreclosure agreement is straightforward to draft.

The information needed includes:

• The names of the borrower and lender
• The address and legal description of the property
• The details of the original mortgage, including the amount, date, and where the mortgage is recorded
• The closing date on which the borrower’s property is conveyed to the lender

The lender and borrower must sign the deed in lieu of foreclosure document to finalize it. Consider having witnesses or notary acknowledgment to add validity to the signatures.