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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, along with brief sales, loan modifications, payment plans, and forbearances. Specifically, a deed in lieu is a transaction where the house owner voluntarily transfers title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank concurring not to pursue a foreclosure.

In many cases, completing a deed in lieu will release the customer from all obligations and liability under the mortgage agreement 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 primary step in acquiring a deed in lieu is for the borrower to ask for a loss mitigation plan from the loan servicer (the business that handles the loan account). The application will need to be filled out and sent along with documentation about the borrower's earnings and costs consisting of:

- evidence of earnings (usually two current pay stubs or, if the customer is self-employed, a profit and loss statement).

recent income tax return.
a financial declaration, detailing regular monthly income and expenditures.
bank statements (generally 2 current declarations for all accounts), and.
a hardship letter or difficulty affidavit.

What Is a Hardship?

A "difficulty" is a situation that is beyond the debtor's control that leads to the borrower no longer being able to manage to make mortgage payments. Hardships that qualify for loss mitigation consideration consist of, for example, job loss, minimized income, death of a partner, illness, medical expenses, divorce, rates of interest reset, and a natural disaster.

Sometimes, the bank will require the debtor to attempt to sell the home for its fair market value before it will think about accepting a deed in lieu. Once the listing period ends, assuming the residential or commercial property hasn't offered, the servicer will purchase a title search.

The bank will generally just accept a deed in lieu of foreclosure on a first mortgage, meaning there must be no additional liens-like second mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the exact same bank holds both the very first and the second mortgage on the home. Alternatively, a debtor can choose to pay off any extra liens, such as a tax lien or judgment, to help with the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers cost viewpoint (BPO) to determine the reasonable market worth of the residential or commercial property.

To finish the deed in lieu, the debtor will be needed to sign a grant deed in lieu of foreclosure, which is the document that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the agreement in between the bank and the debtor and will consist of an arrangement that the customer acted easily and willingly, not under browbeating or pressure. This file may also consist of provisions dealing with whether the deal is in complete satisfaction of the financial obligation or whether the bank deserves to seek a deficiency 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 many deeds in lieu, the bank can't get a deficiency judgment for the difference between the home's fair market value and the financial obligation.

But if the bank desires to protect its right to seek a shortage judgment, a lot of jurisdictions allow the bank to do so by plainly stating in the deal documents that a balance stays after the deed in lieu. The bank normally needs to specify the quantity of the deficiency and include this amount in the deed in lieu files or in a separate arrangement.

Whether the bank can pursue a deficiency judgment following a deed in lieu also often depends upon state law. Washington, for example, has at least one case that mentions a loan holder may not obtain a shortage judgment after a deed in lieu, even if the factor to consider is less than a full discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that due to the fact that the deed in lieu was effectively 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 for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is eligible for a deed in lieu has 3 choices after completing the deal:

- vacating the home instantly.
participating in a three-month shift lease without any lease payment needed, or.
participating in a twelve-month lease and paying rent at market rate.

For more details on requirements and how to take part in the program, go here.

Similarly, if Freddie Mac owns your loan, you may be eligible for an unique deed in lieu program, which might include relocation help.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a shortage judgment against a homeowner as part of a foreclosure or after that by submitting a separate lawsuit. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a shortage judgment versus you after a foreclosure, you might be much better off letting a foreclosure occur 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 concur to forgive or lower the shortage, you get some cash as part of the deal, or you receive additional time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific advice about what to do in your specific scenario, speak to a regional foreclosure lawyer.

Also, you need to think about how long it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will buy loans made two years after a deed in lieu if there are extenuating situations, like divorce, medical costs, or a job layoff that caused you economic trouble, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, the waiting period for a Fannie Mae loan is seven years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, brief sales, and deeds in lieu the very same, usually making it's mortgage insurance coverage readily available after three years.

When to Seek Counsel

If you need help comprehending the deed in lieu procedure or interpreting the documents you'll be required to sign, you must consider seeking advice from a certified attorney. An attorney can also assist you work out a release of your personal liability or a minimized shortage if essential.