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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, in addition to short sales, loan adjustments, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the house owner voluntarily moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank concurring not to pursue a foreclosure.

For the most part, completing a deed in lieu will release the customer from all responsibilities and liability under the mortgage agreement 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 getting a deed in lieu is for the customer to request a loss mitigation bundle from the loan servicer (the company that manages the loan account). The application will need to be filled out and submitted along with documents about the customer’s income and expenditures including:

- evidence of earnings (usually 2 current pay stubs or, if the customer is self-employed, a revenue and loss declaration).

• recent income tax return.
• a monetary declaration, detailing month-to-month income and expenditures.
• bank statements (typically two recent statements for all accounts), and.
• a challenge letter or hardship affidavit.
  
  What Is a Hardship?
  
  A “challenge” is a situation that is beyond the customer’s control that results in the borrower no longer having the ability to manage to make mortgage payments. Hardships that get approved for loss mitigation factor to consider consist of, for instance, job loss, reduced income, death of a partner, illness, medical expenditures, divorce, interest rate reset, and a natural disaster.
  
  Sometimes, the bank will need the customer to attempt to offer the home for its reasonable market price 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 order a title search.
  
  The bank will typically only accept a deed in lieu of foreclosure on a first mortgage, implying there need to be no additional liens-like second mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic rule is if the very same bank holds both the very first and the second mortgage on the home. Alternatively, a borrower can pick to pay off any additional liens, such as a tax lien or judgment, to help with the deed in lieu deal. If and when the title is clear, then the servicer will schedule a brokers cost viewpoint (BPO) to figure out the fair market value of the residential or commercial property.
  
  To finish the deed in lieu, the borrower will be needed to sign a grant deed in lieu of foreclosure, which is the file that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the terms of the agreement in between the bank and the debtor and will consist of a provision that the borrower acted freely and willingly, not under coercion or duress. This document may likewise consist of provisions addressing whether the transaction remains in complete fulfillment of the debt or whether the bank can look for a deficiency judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is frequently structured so that the deal pleases the mortgage debt. So, with the majority of deeds in lieu, the bank can’t get a deficiency judgment for the difference in between the home’s reasonable market price and the financial obligation.
  
  But if the bank wishes to maintain its right to seek a deficiency judgment, the majority of jurisdictions permit the bank to do so by plainly specifying in the deal files that a balance remains after the deed in lieu. The bank generally requires to define the amount of the deficiency and include this amount in the deed in lieu documents or in a separate arrangement.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu likewise often on state law. Washington, for instance, has at least one case that states a loan holder might not get a shortage judgment after a deed in lieu, even if the consideration is less than a complete discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was efficiently a nonjudicial foreclosure, the borrower was entitled to security under Washington’s anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you may be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is qualified for a deed in lieu has three choices after completing the transaction:
  
  - vacating the home right away.
• entering into a three-month transition lease with no lease payment needed, or.
• participating in a twelve-month lease and paying rent at market rate.
  
  For more details on requirements and how to engage in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be qualified for an unique deed in lieu program, which may consist of relocation support.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a shortage judgment versus a property owner as part of a foreclosure or after that by submitting a different claim. In other states, state law avoids 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 may be much better off letting a foreclosure occur instead of doing a deed in lieu of foreclosure that leaves you responsible for a deficiency.
  
  Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or lower the deficiency, you get some cash as part of the transaction, or you receive additional time to stay in the residential or commercial property (longer than what you ’d get if you let the foreclosure go through). For specific guidance about what to do in your specific scenario, speak with a regional foreclosure legal representative.
  
  Also, you need to take into account for how long it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will buy loans made 2 years after a deed in lieu if there are extenuating scenarios, like divorce, medical bills, or a job layoff that caused you economic trouble, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, 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) treats foreclosures, short sales, and deeds in lieu the very same, generally making it’s mortgage insurance available after 3 years.
  
  When to Seek Counsel
  
  If you need help understanding the deed in lieu process or analyzing the documents you’ll be needed to sign, you must think about speaking with a qualified lawyer. An attorney can likewise help you work out a release of your individual liability or a decreased shortage if required.
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