Steps to Completing a Deed in Lieu Of Foreclosure

A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, along with brief sales, loan modifications, payment plans, and forbearances. Specifically, a deed in lieu is a transaction where the property owner voluntarily moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

Most of the times, finishing a deed in lieu will launch the customer from all responsibilities and liability under the mortgage contract and promissory note.

How Does a Deed in Lieu of Foreclosure Work?
Deficiency Judgments Following a Deed in Lieu of Foreclosure
Mortgage Release Program Under Fannie Mae
Should You Consider Letting the Foreclosure Happen?
When to Seek Counsel
How Does a Deed in Lieu of Foreclosure Work?

The primary step in obtaining a deed in lieu is for the customer to request a loss mitigation package from the loan servicer (the company that manages the loan account). The application will need to be submitted and submitted along with documents about the customer's earnings and expenditures consisting of:

- evidence of income (typically 2 recent pay stubs or, if the borrower is self-employed, an earnings and loss statement). - current tax returns. - a monetary declaration, detailing monthly income and expenses. - bank statements (usually 2 current declarations for all accounts), and. - a challenge letter or difficulty affidavit.

What Is a Hardship?

A "difficulty" is a scenario that is beyond the debtor's control that leads to the debtor no longer having the ability to manage to make mortgage payments. Hardships that get approved for loss mitigation consideration include, for example, job loss, lowered earnings, death of a partner, disease, medical costs, divorce, rate of interest reset, and a natural disaster.

Sometimes, the bank will need the customer to attempt to sell the home for its reasonable market worth before it will consider accepting a deed in lieu. Once the listing duration ends, assuming the residential or commercial property hasn't sold, the servicer will purchase a title search.

The bank will generally just accept a deed in lieu of foreclosure on a very first mortgage, suggesting there need to be no extra liens-like 2nd mortgages, judgments from financial institutions, or tax liens-on the residential or commercial property. An exception to this basic rule is if the exact same bank holds both the first and the second mortgage on the home. Alternatively, a customer can select to pay off any extra liens, such as a tax lien or judgment, to assist in the deed in lieu deal. If and when the title is clear, then the servicer will set up for a brokers cost opinion (BPO) to determine the reasonable market price of the residential or commercial property.

To finish the deed in lieu, the debtor will be needed to sign a grant deed in lieu of foreclosure, which is the file that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the arrangement between the bank and the debtor and will include an arrangement that the customer acted easily and voluntarily, not under coercion or duress. This file may also include provisions addressing whether the deal is in full satisfaction of the financial obligation or whether the bank deserves to seek a shortage judgment.

Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is so that the deal satisfies the mortgage debt. So, with many deeds in lieu, the bank can't get a shortage judgment for the difference in between the home's reasonable market worth and the debt.

But if the bank desires to preserve its right to seek a shortage judgment, most jurisdictions allow the bank to do so by plainly specifying in the transaction files that a balance remains after the deed in lieu. The bank generally requires to specify the amount of the deficiency and include this quantity in the deed in lieu documents or in a different arrangement.

Whether the bank can pursue a shortage judgment following a deed in lieu likewise sometimes depends on state law. Washington, for instance, has at least one case that mentions a loan holder might not obtain a deficiency judgment after a deed in lieu, even if the consideration is less than a full discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that due to the fact that the deed in lieu was successfully a nonjudicial foreclosure, the customer was entitled to protection under Washington's anti-deficiency laws.

Mortgage Release Program Under Fannie Mae

If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is eligible for a deed in lieu has three choices after completing the transaction:

- vacating the home immediately. - getting in into a three-month shift lease with no rent payment required, or. - participating in a twelve-month lease and paying lease at market rate.

For more details on requirements and how to take part in the program, go here.

Similarly, if Freddie Mac owns your loan, you may be qualified for an unique deed in lieu program, which might include moving help.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a shortage judgment against a property owner as part of a foreclosure or after that by submitting a separate claim. In other states, state law prevents a bank from getting a shortage judgment following a foreclosure. If the bank can't get a shortage judgment versus you after a foreclosure, you might be much better off letting a foreclosure occur instead of doing a deed in lieu of foreclosure that leaves you accountable for a shortage.

Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to agree to forgive or minimize the deficiency, you get some cash as part of the transaction, or you receive extra time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific recommendations about what to do in your specific circumstance, speak to a regional foreclosure lawyer.

Also, you should take into account for how long it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will purchase loans made 2 years after a deed in lieu if there are extenuating situations, like divorce, medical bills, or a task layoff that triggered you financial trouble, 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 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the exact same, typically making it's mortgage insurance readily available after three years.

When to Seek Counsel

If you need assistance understanding the deed in lieu procedure or translating the documents you'll be required to sign, you should think about consulting with a qualified attorney. An attorney can also help you negotiate a release of your personal liability or a decreased shortage if necessary.