How to Do a Deed in Lieu of Foreclosure
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A deed in lieu of foreclosure is going to vary somewhat depending on your state and depending on who your loan is through. In some cases, there are specific programs and guidelines in place designed to streamline the process of a deed in lieu of foreclosure. In any case, the key is that both the homeowner and the lender agree that a deed in lieu of foreclosure is the best option and that they work out an agreement together that the homeowner enters into on a voluntary basis.
(See Steps to Complete a Deed in Lieu of Foreclosure for a more detailed analysis.)
Understanding Deed in Lieu of Foreclosure
The deed in lieu of foreclosure process is, in general, a process whereby a homeowner gives up all legal rights to the home in exchange for being absolved of all obligations associated with it. In other words, a lender agrees to essentially take back the home. The mortgage goes away, and the lender gets the house back without having to foreclose. This is far more advantageous to the homeowner than going through the entire foreclosure process, since less damage is done to the homeowner's credit score.
There is also the opportunity to negotiate what will happen if there is a deficit between what the home is worth and what is owed on it. If a lender forecloses and state law allows, the lender can normally come after (sue) the debtor for the deficit balance that isn't recovered in foreclosure. When a deed in lieu of foreclosure option is chosen, because it is voluntary and involves agreement between lender and homeowner, it is possible to negotiate a deal in which the lender agrees not to pursue a deficiency judgment or the borrower agrees to repay the deficit over time.
Finally, in some cases, there is another significant benefit for borrowers: they get to receive relocation money. This is an option with Fannie Mae loans, with VA loans (up to $1500 can be paid) and even in some cases with conventional mortgages when the right criteria is met. The opportunity to receive relocation money is an incentive to borrowers to actively pursue alternatives to foreclosure.
While the above are the basic general features of a deed in lieu of foreclosure, it is also important to understand that there is a process that must be followed, which can vary from lender to lender. Usually, the homeowner falls behind on mortgage payments (around 90 days behind is standard). The homeowner and lender negotiate a deal wherein the homeowner will vacate the home in good condition and sign over all rights to the home to the lender. The homeowner will provide proof of income and financial information and evidence that the home has not or cannot sell for what is owed when selling at fair market value. The process is completed at a "closing" where the homeowner signs the paperwork. In some cases, a letter needs to be submitted that indicates that this process was voluntary on the part of the homeowner.
The process generally takes around 90 days time to complete. In some cases, the lender will allow the homeowner to continue to live in the home even after turning over the deed, as long as this is agreed to. Fannie Mae, for example, offers this option and refers to it as "deed for lease."
If you are trying to avoid foreclosure, you should strongly consider getting help doing so from a lawyer. There are a myriad of different foreclosure avoidance tactics, and some may be better than others, especially for specific situations. To find out if deed in lieu of foreclosure is right for you or to explore other possible options, you should call a lawyer as soon as possible, since some options may require you act sooner rather than later.
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