Tips for Success in a Deed in Lieu of Foreclosure
When facing foreclosure, many automatically think of a short sale. But you may have another option: deed in lieu of foreclosure commonly called just “Deed in Lieu” or a “mortgage release” – a term that references the fact that you are “released” from further obligations on your home loan.
The term “in lieu” means “instead of,” so this phrase quite literally means “deed instead of foreclosure.” With a deed in lieu of foreclosure transaction, homeowners opt to necessarily give up the deed to the property in exchange for a release from their mortgage obligations.
What is a Deed in Lieu of Foreclosure Transaction?
A deed in lieu transaction is the next option in line if a lender declines your requests for a loan modification, forbearance or repayment plan.
A deed in lieu of foreclosure agreement offers some significant benefits. One of the most substantial benefits is the fact that you can avoid foreclosure and the adverse impact that a foreclosure will have on your credit history. What's more, in most instances, a deed in lieu transaction frees the borrower from any deficiency judgments. Whereas in the case of a short sale, it's not uncommon for the borrower to be liable for the difference between the sale price of the home and the amount borrowed. So if you were to owe $250,000, but sold the home in a short sale for $200,000, there is a chance the lender could seek out a deficiency judgment for the $50,000 balance.)
In cases where the lender is unlikely to approve a short sale, they may be more apt to accept a deed in lieu of foreclosure since they can acquire the property without the expenses associated with a short sale and the lender will be free to maintain the property as a holding until the real estate market recovers to a point where they can regain a larger sum of money on the property.
How Can I Maximize My Chances of a Successful Deed in Lieu of Foreclosure Transaction?
When pursuing a deed in lieu transaction, you'll need to provide your lender with a range of different documents and information. It can be beneficial to hire a real estate attorney with experience in foreclosure and debt relief to help you to prepare the appropriate documentation. Your attorney can also review the documents that you will need to sign to finalize the transaction, including an estoppel affidavit and a deed to transfer property ownership.
Providing your lender with the required documentation is essential, and it will dramatically increase your chances of successfully completing a deed in lieu of foreclosure transaction promptly. These important documents include:
- A financial statement with detailed information on your monthly earnings, income, and expenses
- A hardship letter, detailing your difficult financial situation
- Bank account statements for each account. Typically, you must provide statements for the past two to three months for every account
- Proof of income if you have a job or other sources of revenue
- Your most recent tax returns.
Also, you may wish to consider listing your home for sale before pursuing a deed in lieu. Your chances of getting approved for a deed in lieu of foreclosure transaction are far greater if you recently attempted to sell the property but were unable to do so at an appropriate price. In fact, listing your home for sale is a requirement with many lenders.
Most real estate experts recommend listing the property for a minimum of 90 days (three months) to maximize your chances of seeing a successful deed in lieu of foreclosure transaction.
If you have already tried to sell your home, you can typically provide the lender with a copy of the listing agreement that you signed with your real estate agent.
Reducing the Chances of a Deficiency Judgment
Many consider a “successful” deed in lieu transaction as one that does not result in a deficiency judgment. While deficiency judgments are less familiar with a deed in lieu, this can occur in certain cases.
Some states do not allow for deficiency judgments in this type of transaction, so a bit of research (or consulting with your real estate attorney) can provide you with useful insight in this regard.
If you do live in a state where the lender can seek a deficiency judgment, there are some other options.
You can eliminate your chances of seeing a deficiency judgment by pursuing an HAFA (Home Affordable Foreclosure Alternatives Program) deed in lieu of foreclosure transaction. Only certain homeowners are eligible to continue this avenue, including those with a documented financial hardship with a mortgage of less than $729,750 which was secured on or before January 1, 2009. To be eligible, you cannot have a home purchase within the past 12 months, and you cannot have a conviction on certain crimes, such as felony larceny, tax evasion or another mortgage/real estate-related crime.
If you do qualify for HAFA, the lender will be unable to file a deficiency judgment. You could also qualify for up to $10,000 in funding to cover your relocation expenses.
With these tips, you should be well on your way to a successful deed in lieu of foreclosure transaction so you can move ahead with your life, putting a painful experience behind you.
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- Working With Your Lender to Stop Foreclosure
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