Deed in Lieu of Foreclosure Process and Information

If you're behind on your mortgage payments, one way to avoid a foreclosure is by completing a deed in lieu of foreclosure (deed in lieu). With a deed in lieu, you agree to give up the home, and the lender agrees not to foreclose.

As part of the transaction, you might even receive relocation assistance, which could be a thousand dollars or more when available.

What Is a Deed in Lieu of Foreclosure?

In a deed in lieu transaction, a homeowner who's facing a foreclosure gives up all legal rights to the home in exchange for getting out of having to comply with the loan obligations.

In other words, the lender agrees to take ownership of the home in exchange for agreeing not to foreclose. The mortgage loan goes away, and the lender gets title to the house without having to foreclose.

How the Deed in Lieu of Foreclosure Process Works

The process for completing a deed in lieu varies somewhat depending on who your loan servicer is and who the lender (or current owner of your loan, called an "investor") is.

How to Process Usually Works

Generally, you'll have to try to sell the property for at least 90 days at fair market value before the lender will agree to accept a deed in lieu. Also, you usually must have clear title, which means you can't have other liens on your home. You might have to provide details about your finances and show that the home won't sell for what's owed.

What You'll Need to Agree To

As part of the deal, the homeowner usually agrees to vacate the home, leaving it in good ("broom swept") condition, and sign over ownership to the lender. In some cases, the borrower will have to submit an affidavit indicating that the process was voluntary.

Sometimes, the lender will allow the homeowner to rent the home even after turning over the deed. Fannie Mae, for example, offers this option to borrowers who have Fannie Mae loans.

Also, in some cases, the departing homeowner will receive relocation money after completing a deed in lieu.

Reasons to Consider Completing a Deed in Lieu

Some people think that completing a deed in lieu will cause less damage to their credit scores than a foreclosure. But the difference in how a foreclosure or deed in lieu affects your credit is minimal. For this reason, it might not be worth doing a deed in lieu unless:

• the lender agrees to forgive or reduce the deficiency
• you get some cash as part of the deal, or
• you get some extra time to live in the home (longer than what you'd get if you let the foreclosure go through).

In some cases, the lender will agree to one or more of these conditions to avoid the expense and hassle of foreclosing.

Reasons to Consider Not Completing a Deed in Lieu

If you have a lot of equity in the property, however, a deed in lieu is usually a bad option. You'd be better off by selling the property and paying off the debt.

Also, your lender might file a lawsuit against you to get a deficiency judgment if it doesn't waive its right to get the difference between what you owe on the mortgage loan and the property's fair market value. If you won't face a deficiency judgment after a foreclosure, but you could after a deed in lieu, it might make sense to let the home go in a foreclosure. For specific advice about what to do in your particular situation, talk to a local foreclosure attorney.

And you might consider filing for Chapter 13 bankruptcy with a plan to sell your home or get caught up on the overdue amounts.

Negotiating the Deficiency Judgment

With a deed in lieu, the homeowner may negotiate what will happen to the deficiency, if one exists. Because a deed in lieu is a voluntary agreement between you and the lender, it's possible to negotiate a deal in which:

• the lender agrees not to pursue a deficiency judgment
• you agree pay part of the deficiency, or
• you agree to repay the deficit over time.

Be aware that, if the lender forgives all or part of the deficiency, you might face tax consequences.

When Can I Get a New Mortgage After a Deed in Lieu of Foreclosure

Also, you should consider how long it will take to get a new mortgage after a deed in lieu versus a foreclosure.

Fannie Mae Loans

Fannie Mae, for instance, will buy loans made two years after a deed in lieu if extenuating circumstances led to your default, like divorce, medical bills, or a job layoff that caused you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting period for a Fannie Mae loan is seven years after a foreclosure or four years after a deed in lieu.)

FHA-Insured Mortgage Loans

On the other hand, the Federal Housing Administration (FHA) treats foreclosures, short sales, and deeds in lieu the same, usually making its home loan insurance available after three years.

Talk to a Lawyer

If you're considering completing a deed in lieu, consider talking to a lawyer. Many different foreclosure avoidance options exist, including loan modifications and short sales, and some options might be better than others, especially for specific situations.

To find out if a deed in lieu might be right for you or to explore other possible options, contact a lawyer.