Deed in lieu of foreclosure refers to a specific type of real estate deed and alternative to foreclosure. Foreclosure is the forced sale of a home or property by a financial institution. Deed in lieu of foreclosure legally transfers all interest in a home to the mortgage lender. The purpose of a deed in lieu is to satisfy any outstanding debt payments when the lender refuses to accept any requests for repayment plans, forbearance, or loan modification. This is a voluntary transfer on the part of the homeowner.
A common example of a deed in lieu of foreclosure would be when a person takes out a mortgage for their home, but finds themselves unable to make their payments for several months. The homeowner runs the risk of losing their house through the foreclosure process. This could impact their future ability to qualify for credit, and to purchase a new home once they’ve lost theirs to foreclosure. Creating a deed in lieu of foreclosure would allow the homeowner to avoid the time, costs, and lasting implications of foreclosure proceedings.
For the borrower, a deed in lieu allows them to avoid any feelings of embarrassment that are often associated with the public knowledge of their foreclosure. Additionally, the borrower may be released from all or most of the debt associated with the defaulted mortgage loan. The lender could stand to benefit as well. There may be a reduction in time in the overall debt settlement process when compared to traditional foreclosure proceedings. And, there may be reduced repossession costs.
What Is the Process for a Deed in Lieu of Foreclosure?
The process for a deed in lieu of foreclosure varies from state to state. The loan servicer or whoever is responsible for handling the account on behalf of the loan owner will influence the process. Additionally, the actual loan lender will also influence the process for a deed in lieu of foreclosure.
Generally speaking, the process begins once the homeowner falls behind on their payments. From there, the homeowner and then lender negotiate a deal in which the homeowner signs over all rights to the home to the lender, and vacates the property. In some cases, the lender will allow the homeowner to remain living in the home, even once the homeowner has turned over the deed.
The homeowner will typically fill out an application and submit it to the loan servicer, along with documentation regarding income and expenses. This documentation could include:
- A financial statement;
- Proof of income;
- The homeowner’s most recent tax returns;
- Bank statements; and
- A hardship affidavit or statement.
Some lenders may also require that the homeowner try to sell the home before they will accept a deed in lieu. Lenders could also require a copy of the listing agreement as proof of such an attempt.
Once the request for the deed in lieu of foreclosure has been approved, the homeowner must sign a deed that transfers ownership of the property from the homeowner to the lender. They will also need to sign an estoppel affidavit. Simply put, an estoppel affidavit legally prohibits the parties from taking any action that is contrary to a previously made agreement. The estoppel affidavit outlines the terms of the agreement as well as any necessary provisions.
What Are Advantages and Disadvantages of a Deed in Lieu of Foreclosure?
Some of the advantages of a deed in lieu of foreclosure include the following:
- Allowing the homeowner to avoid or minimize any deficiency in their mortgage, as many states allow lenders to pursue borrowers for any deficiency;
- Potential help for moving, such as in a cash for keys arrangement in which the lender offers moving money to ensure that the property is turned over quickly; and
- A minimized credit impact, as foreclosure can damage your credit for many years after the foreclosure process.
However, there are some notable disadvantages to a deed in lieu of foreclosure:
- No lender is obligated to offer a deed in lieu of foreclosure;
- Some types of mortgages are under specific servicing agreements, which means they are not eligible for a deed in lieu of foreclosure;
- Homes that are in poor condition will not likely qualify for a deed in lieu of foreclosure;
- Home with second or third mortgages, including home equity loans or home equity lines of credit, will not likely qualify for a deed in lieu of foreclosure; and
- With a deed in lieu of foreclosure, the homeowner could face taxes on the amount of the debt forgiven as the IRS considers this to be a source of income.
What Else Should I Know About Deeds in Lieu of Foreclosure?
In order for the deed in lieu to be legally enforceable, the deed must be entered into on terms of good faith and compliance. This is required of both parties, and neither party may force or coerce the other party into signing a deed in lieu of foreclosure. Additionally, the transfer must represent the entire fair market value of the property being transferred.
It is important to note that a deed in lieu is essentially a contract. As such, in order to be enforceable, it must satisfy all the requirements of a valid contract. An example of this would be that the deed in lieu must be in writing, and must be signed by both parties. If you are facing a dispute over the deed, you would do well to check that it is valid under your state’s contract laws; you may need to re-examine the conditions under which the agreement was made.
As previously mentioned, the purpose of a deed in lieu of foreclosure is to avoid foreclosure if at all possible. Although this can be a great option, it will not save your ownership of the property. Some foreclosure alternatives that allow the homeowner to retain their ownership include:
- Mortgage Modification: An arrangement in which the borrower refinances their debt by modifying the mortgage terms;
- Forbearance by Special Request: This is a temporary reduction, or even suspension, of monthly payments;
- Reinstatement: Reinstatement is helpful if the financial issues are temporary. The loan institution is paid the entire amounts that are past due, in addition to any interest, late fees, or penalties; and
- Filing a Partial Claim: Certain insurance funds meant to get your mortgage current.
What If I Encounter a Dispute Over a Deed in Lieu?
In order to be considered valid, a deed in lieu must meet all of the basic requirements for any deed:
- Names and contact info of the parties;
- A description identifying the property to be transferred;
- A statement indicating the debtor’s intent to transfer their property to the lender; and
- Signatures of the parties.
If any of these statutory requirements for a deed in lieu are not met, there may be a dispute over the validity of the entire agreement. An example of this would be if the property cannot be easily identified from the deed language. A court may hold the deed to be invalid. This is similar to a contract dispute in which the contract formalities have not been met.
Other sources of disputes over deeds in lieu can include, but may not be limited to:
- Use of Force or Coercion: As previously mentioned, the agreement to use a deed in lieu must be entered into voluntarily and freely. Neither party may lawfully use force or coercion in order to make the other party sign an agreement;
- Fairness: The transfer must be equivalent to the fair market value of the property being forfeited. For example, the debtor generally cannot attempt to deed only a portion of the land, or to convey at a lower cost; and
- Legality: The deed provisions may not violate any state laws or statutes in any way. This is important to remember, as deed rules may have specific differences in each state.
If the parties cannot come to an agreement regarding a deed in lieu, the parties involved may need to proceed with foreclosure proceedings. In most cases, disputes can be avoided through clear drafting of the documents and a firm understanding of the deed by both parties.
Do I Need an Attorney for Help with an Issue with a Deed in Lieu of Foreclosure?
If you are facing foreclosure on your home, and would like to explore the possibility of a deed in lieu of foreclosure, you should consult with a skilled and knowledgeable real estate lawyer. An experienced real estate attorney can help draft, review, and edit the deed in order to ensure it meets all standards of being enforceable. Finally, should any issues arise, an experienced local attorney will represent you in court as needed.