What is Deed in Lieu of Foreclosure?
- By Simon Volkov
- Published 10/12/2011
- Real Estate
- Unrated
Deed in lieu of foreclosure is a legally-binding financial agreement between borrowers and their lender which is used 'in lieu' of the foreclosure process. Although a somewhat complex process, deed in lieu lets borrowers return their home to the bank and walk away. Once contracts are in place the lender takes immediate possession of the real estate.
The main benefit of deed in lieu of foreclosure is mortgagors are released from their mortgage note in exchange for return of the property. They lose all vested funds and do not receive any money if profits are earned from the sale of their home. Specific protocol must be followed and real estate transfer documents are recorded through local courts.
The primary disadvantage of deed in lieu agreements is borrowers' credit is severely damaged. Deed in lieu is perceived as foreclosure by credit bureaus and can remain on credit reports for up to ten years or longer. When banks issue deficiency judgments, deed in lieu can remain on credit history for up to seven years after the debt is repaid.
Mortgagors often witness a FICO score reduction of 100 points or more. Unfortunately, there is little that can be done to restore credit during the initial phase of deed in lieu. Debtors should strive to engage in credit repair efforts by reducing credit card debt and paying their bills on time and in full each month. By being financially proactive, debtors can build positive credit within a few years if they commit to a household budget and live within their means.
Mortgage lenders are not required to provide deed in lieu agreements. However, it makes good financial sense. A report issued by Freddie Mac claims the average cost of foreclosure hovers around $60,000 per property, whereas the cost of deed in lieu is about $2500. Oftentimes, mortgagors are responsible for deed in lieu costs to transfer property d
eeds.
Deed in lieu of foreclosure contracts must be signed by mortgagors and their lender. Contracts are notarized and submitted through the court system. This is known as the Parole Evidence Rule which protects banks in the event mortgagors later claim they were persuaded by their lender to enter into the agreement.
In order for property to qualify for deed in lieu it must be owner occupied. Vacation homes and investment properties do not qualify. Lenders rarely offer deed in lieu when the mortgage note balance is higher than the current appraised value.
Borrowers must meet specific criteria to qualify for deed in lieu of foreclosure. Mortgagors must be a minimum of 31 days delinquent on loan installments. However, deed in lieu is almost always used as a last resort after all other options have been exhausted. Mortgage providers generally try to devise plans to help borrowers stay in their home such as real estate forbearance, loan modification, or mortgage refinance.
Mortgagors must contact their bank's loss mitigation department to determine if deed in lieu is a viable option. If approval is granted, borrowers will work with an assigned loss mitigator throughout the process. Protocol varies by lender, but most require borrowers to provide records proving financial insolvency, along with a foreclosure hardship letter, list of income and expenses, tax returns and bank statements.
Banks oftentimes obtain court-ordered deficiency judgments which hold mortgagors responsible for monetary deficiency between the mortgage loan balance and property sale price. For example, if you owe $125,000 on your loan and the bank sells the house for $100,000, you would be held responsible for the $25,000 deficiency.
It is important to determine if your lender issues deficiency judgments or accepts the return of the property as payment in full. When necessary, obtain assistance from a foreclosure specialist or real estate attorney to negotiate a payment in full deed in lieu agreement.
The main benefit of deed in lieu of foreclosure is mortgagors are released from their mortgage note in exchange for return of the property. They lose all vested funds and do not receive any money if profits are earned from the sale of their home. Specific protocol must be followed and real estate transfer documents are recorded through local courts.
The primary disadvantage of deed in lieu agreements is borrowers' credit is severely damaged. Deed in lieu is perceived as foreclosure by credit bureaus and can remain on credit reports for up to ten years or longer. When banks issue deficiency judgments, deed in lieu can remain on credit history for up to seven years after the debt is repaid.
Mortgagors often witness a FICO score reduction of 100 points or more. Unfortunately, there is little that can be done to restore credit during the initial phase of deed in lieu. Debtors should strive to engage in credit repair efforts by reducing credit card debt and paying their bills on time and in full each month. By being financially proactive, debtors can build positive credit within a few years if they commit to a household budget and live within their means.
Mortgage lenders are not required to provide deed in lieu agreements. However, it makes good financial sense. A report issued by Freddie Mac claims the average cost of foreclosure hovers around $60,000 per property, whereas the cost of deed in lieu is about $2500. Oftentimes, mortgagors are responsible for deed in lieu costs to transfer property d
Deed in lieu of foreclosure contracts must be signed by mortgagors and their lender. Contracts are notarized and submitted through the court system. This is known as the Parole Evidence Rule which protects banks in the event mortgagors later claim they were persuaded by their lender to enter into the agreement.
In order for property to qualify for deed in lieu it must be owner occupied. Vacation homes and investment properties do not qualify. Lenders rarely offer deed in lieu when the mortgage note balance is higher than the current appraised value.
Borrowers must meet specific criteria to qualify for deed in lieu of foreclosure. Mortgagors must be a minimum of 31 days delinquent on loan installments. However, deed in lieu is almost always used as a last resort after all other options have been exhausted. Mortgage providers generally try to devise plans to help borrowers stay in their home such as real estate forbearance, loan modification, or mortgage refinance.
Mortgagors must contact their bank's loss mitigation department to determine if deed in lieu is a viable option. If approval is granted, borrowers will work with an assigned loss mitigator throughout the process. Protocol varies by lender, but most require borrowers to provide records proving financial insolvency, along with a foreclosure hardship letter, list of income and expenses, tax returns and bank statements.
Banks oftentimes obtain court-ordered deficiency judgments which hold mortgagors responsible for monetary deficiency between the mortgage loan balance and property sale price. For example, if you owe $125,000 on your loan and the bank sells the house for $100,000, you would be held responsible for the $25,000 deficiency.
It is important to determine if your lender issues deficiency judgments or accepts the return of the property as payment in full. When necessary, obtain assistance from a foreclosure specialist or real estate attorney to negotiate a payment in full deed in lieu agreement.
Simon Volkov
Simon Volkov is a California real estate investor who specializes in buying distressed properties in Orange County. His website offers numerous articles regarding deed in lieu of foreclosure, real estate short sales, loan modifications and foreclosure prevention. Learn more at www.SimonVolkov.com.
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