There are many options open to a homeowner facing financial difficulty and foreclosure. One option offered by mortgage companies is a deed in lieu of foreclosure.
When a homeowner executes a deed in lieu of foreclosure, he or she surrenders the home to the lender and moves out because the homeowner can no longer pay mortgage on the property. The process entails signing over the deed to the property to the lender, who in turn cancels the note and mortgage. The lender and the borrower must enter the agreement voluntarily and in good faith.
The Process of Obtaining a Deed in Lieu of Foreclosure
Imagine that after due deliberation, you decide that you cannot keep making your mortgage payments. You and your family are going to downsize or find a more affordable place to live. When you contact your lender with your decision they will probably ask you to complete some paperwork and show them that you can no longer afford your mortgage payments because of a loss in income or increase in expenses. Once you complete the paperwork your mortgage company will examine your request, and if they consider going that path with you beneficial, they will inform you of their decision. The whole process can take several months and your mortgage company may need additional documents from you at various times so make sure to keep your contact information current.
The lender will draw up the Deed in Lieu of Foreclosure Agreement to be witnessed by two individuals, signed by the grantor (the homeowner), and notarized by a notary public. Once the deed has been executed, it must be delivered to the grantee (the mortgage company or the owner of the note) and also recorded in the official records.
The process for obtaining a deed in lieu of foreclosure is not always straightforward, so you need a seasoned attorney to assist you. There are certain pitfalls you need to avoid that a lawyer can help you with. For instance, the lender may seek a deficiency judgment even after the deed has been signed. This will give them the authority to take further debt collection actions against you, including filing a lawsuit in order to have you to pay the balance of the mortgage debt.
Considerations for signing a Deed in Lieu of Foreclosure
- The homeowner must have undergone a hardship.
- He or she must have exhausted all other viable options and financial resources.
- The Deed on the property must usually be the individual’s homestead and not an investment property.
- There must not be any other liens on the property.
- The property must have been on the market for 90 to 180 days.
- The property should be left in excellent condition by the borrower.
A deficiency resulting from the cancellation of mortgage debt may be considered as debt forgiveness by the IRS and therefore considered income. You may be required to pay taxes on that amount forgiven. This can be negotiated with the mortgage company or the IRS, which is another reason you need the assistance of an attorney.
There are certain advantages to a deed in lieu of foreclosure both for the borrower and the lender.
- The borrower can heave a sigh of relief because the obligations of the property are shifted to the lender.
- By accepting a deed in lieu of foreclosure, the borrower is saved the hassles associated with foreclosure.
- The lender and borrower save money and time on legal fees and bureaucracy associated with foreclosure.
- There is less public visibility and a lighter impact on your credit score from a deed in lieu of foreclosure than a judgment of foreclosure.
However, you should note that you will have to move out of your home and negotiate for an extended move out/surrender date. To make the rigorous process easier, let an attorney assist you.