If you are facing foreclosure and all other options to avoid it have failed, deed in lieu of foreclosure may be the right route for you. It is one of the loss mitigation options provided by HUD (US Department of Housing and Urban Development) to help borrowers avoid foreclosures. Essentially, deed in lieu of foreclosure allows you to give your property back to your lender in exchange for the erasure of your mortgage debt.
Deed in Lieu of Foreclosure Is a Last Resort
You lose your home in this type of agreement, so it is by no means a desirable option to avoid being foreclosed upon. It should be treated as a last-ditch effort. HUD requires that you explore and rule out all its other loss mitigation options before you pursue a deed-in-lieu. Carefully consider the other options for
foreclosure avoidance that are available to see if you qualify.
Advantages of Deed in Lieu of Foreclosure
The biggest advantage that this option offers is that you avoid being officially foreclosed upon. The foreclosing process is costly, time-consuming, and can be humiliating. This option, while still detrimental to your credit score, is less destructive than having your credit report say that you were foreclosed upon by a lender.
Since you are already at the end of the road in your quest to avoid foreclosure if you are considering a deed in lieu of foreclosure, you may receive better settlement terms from your lender if you sign your home over voluntarily instead of waiting for them to use foreclosure to force you to vacate your property.
Once you have finished the process of a deed in lieu of foreclosure and you and your lender have agreed to a settlement, part of the agreement will be that your lender will not pursue you to recoup any loss it incurs in the sale of your house. That is to say, you cannot be punished if your house sells for less than your cancelled debt was worth.
If there is some equity in your home and your lender consequently receives a higher sale price for it than the amount of your debt, the lender may offer you some compensation, up to a limit of $2,000.
Eligibility for Deed in Lieu of Foreclosure
HUD requires that the borrower already be in default and at least thirty-one days delinquent on mortgage payments before deed in lieu of foreclosure is an option. Your lender does, however, have the ability to waive this requirement and allow a borrower who is current in his payments to pursue the deed-in-lieu option.
To be eligible for a deed in lieu of foreclosure, the borrower must be living in the property on which he holds the loan, although there are special circumstances in which this requirement may be waived.
The borrower must be able to explain in writing the circumstances that lead to his default on the mortgage and the threat of foreclosure. Some lenders will require that the borrower has had the home listed for sale with a real estate agent and has been unable to find a buyer.
The Process of Deed in Lieu of Foreclosure
A deed in lieu of foreclosure must be a voluntary agreement to avoid foreclosure on the part of both the borrower and the lender. Because this is a HUD requirement, the lender may require that the borrower provide a written request to negotiate a deed-in-lieu, proving that the lender did not pressure the borrower into the process to avoid foreclosure.
The process must be completed within ninety days of its commencement. During the negotiation process, the lender and borrower will agree on a date upon which the official transfer of property ownership will occur. The borrower must provide an itemized list of the keys and fixtures that will be transferred to the lender along with the home. A statement describing the physical condition of the home is also required from the borrower.
When it is turned over to the lender, the home must be empty of all the borrower's furniture and possessions unless a different agreement has been reached with the lender. Lenders generally require borrowers to provide proof that all utilities, association fees, and other costs associated with the property have been paid in full before ownership is transferred.
Potential Issues
A deed in lieu of foreclosure is effectively an exchange of your home for the forgiveness of your mortgage debt, and it must be entered into voluntarily by both borrower and lender. Therefore, if the current fair market value of your home is less than the amount that you owe on your mortgage, your lender might receive more money from a foreclosure than a deed in lieu of foreclosure. In this case, your lender may choose not to cooperate in the process.
Because this process is a cancelling of your debt instead of foreclosure, the IRS may view the value of the debt forgiven as income to you. Therefore, you may have to pay tax on the amount of your former mortgage. Some states encourage borrowers to avoid foreclosure by using the Mortgage Debt Forgiveness Tax Relief Act to offer tax exemptions for those who qualify.