Deed in Lieu of Foreclosure

A deed in lieu of foreclosure (usually referred to simply as a “deed in lieu”) is a process by which the debtor signs a deed transferring all of his/her rights, title, and interest in the property to the lender in satisfaction of the debt and as a substitute for foreclosing on the property.  The rationale for a deed in lieu is that a debtor gets to avoid a foreclosure and a lender gets to avoid the time and cost associated with a foreclosure.

Before approaching your lender about a deed in lieu, it would be wise to have your financial information organized as the mortgage company will likely want you to establish the nature of your current hardship and to explain why you are unable to make your mortgage payments.  

A deed in lieu of foreclosure could be more beneficial than a foreclosure for several reasons.  One primary benefit would be keeping a foreclosure off of credit reports.  Even with a deed in lieu however, the lender will likely include a notation on the account showing that a deed in lieu was signed or that the account was “settled for less than the full balance.”

Lenders have been increasingly reluctant to accept deeds in lieu because they create the opportunity for title issues.  The mortgage company’s rationale is that a foreclosure “cleans” the title and should strip any existing liens whereas a deed in lieu might not.  Having said this, the government has begun to try and offer incentives to mortgage companies that will accept deed in lieu of foreclosures on Fannie Mae or Freddie Mac loans.  Therefore, if you have a Fannie Mae or Freddie Mac loan, you are more than 90 days in arrears, and you became delinquent because of an identifiable hardship (unemployment, divorce, death, etc.), a deed in lieu of foreclosure might be a solution for you.

Be mindful that many of the same warnings regarding a loan modification will be applicable to an application for a deed in lieu of foreclosure.  Many lenders will require that you have had the house listed on the market for at least 90 days before they will consider a deed in lieu of foreclosure.  You will likely have to stay on top of the mortgage company to make sure the process is being moved forward.  Many times the right hand doesn’t know what the left hand is doing with these companies and the only way to accomplish your goal is to continually monitor the situation.

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