A deed in lieu of foreclosure is a specific type of real estate deed, and is used as an alternative to foreclosure (the forced sale of a home or property by a financial institution). This type of deed 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 has refused to accept requests for repayment plans, forbearance, or loan modification. This transfer is voluntary on the part of the homeowner.
A common example of a deed in lieu of foreclosure is when a person takes out a mortgage for their home, but finds themselves unable to make payments for several months. They run the risk of losing their house through the foreclosure process, which could impact their future ability to qualify for credit and purchase a new home once they’ve lost theirs. 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 feelings of embarrassment that are often associated with public knowledge of their foreclosure. Further, they may be released from all or most of the debt associated with the defaulted mortgage loan.
The lender may benefit as well. There could be a reduction in time in the overall debt settlement process when compared to traditional foreclosure proceedings. Additionally, there could be reduced repossession costs.
The process for a deed in lieu of foreclosure varies from state to state. Your loan servicer, or whoever is handling the account on behalf of the loan owner, as well as the actual lender, will also influence the process. In general, 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 leaves the property. Sometimes the lender will allow the homeowner to remain living in the home, even after 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, most recent tax returns, bank statements, and a hardship affidavit or statement. Some lenders may require that the homeowner try to sell the home before they will accept a deed in lieu, and could also require a copy of the listing agreement as proof.
If the request for the deed in lieu of foreclosure is approved, the homeowner will need to sign a deed that transfers ownership of the property from the homeowner to the lender, and an estoppel affidavit. Essentially, an estoppel affidavit legally prohibits the parties from taking any action that is contrary to a previously made agreement. It outlines the terms of the agreement and any necessary provisions.
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. 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. In order to be enforceable, it must satisfy all the requirements of a valid contract, such as being in writing and signed by both parties. If faced with a dispute over the deed, you should 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.
The purpose of a deed in lieu of foreclosure is to avoid foreclosure if at all possible. Further, although 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: 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: this 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.
If you are facing foreclosure and would like to explore your options, such as a deed in lieu of foreclosure, you will need a knowledgeable and qualified real estate attorney. They will help draft, review, and edit the deed to ensure it is a legally enforceable contract. Additionally, they can represent you in court, if a lawsuit should occur.