Facts:
- It can be a great option for getting out from under an upside-down mortgage.
- It is often the first avenue to try.
- It can be pursued with minimal attorney involvement.
A deed-in-lieu of foreclosure is not as cut-and-dry as it sounds. We recommend seeking legal counsel before contacting the bank and after receiving the deed-in-lieu final paperwork. As a part of a strategy development consultation, Ben helps clients understand their unique financial situation, what financial information the lender will likely request, the likelihood of success, what’s at stake, and the back-up plan or fall-back position.
If the bank agrees to a deed-in-lieu, Ben reviews the final paperwork to determine if the lender is agreeing to waive the deficiency in exchange for the deed-in-lieu, or, if the lender is simply accepting the property, without waiving the deficiency – the difference between the property’s value and amount of the debt.
Avoid Deficiency Judgment
The primary objective with a deed-in-lieu is deficiency judgment avoidance. Not all deed-in-lieu agreements include a provision to waive deficiency. And in some cases the fine print differs from what the lender said and you understood. Why give up your property if the bank is not willing to cancel the debt? Your ownership of the property is your leverage – don’t give up your leverage without getting something in return.
That being said, depending upon your specific financial situation, there may be reasons to complete a deed-in-lieu of foreclosure even where the lender will not agree to waive deficiency. As such, an in-depth discussion of risks and rewards and how they relate to the client’s specific financial situation would be necessary.
Understand Your Situation
It’s important to understand your financial situation and know what’s at stake before contacting the bank. The bank will often ask for detailed financial information – even though they don’t need to know how much you make or the type and nature of your assets to make their determination. The lender’s request for your financial information is merely a fishing expedition to determine if you are the type of person they would pursue for a deficiency. More on the lender’s fishing expedition.
Whether or not you should disclose your financial information to the bank is a tricky question. Ben can help you determine if disclosure of your financial affairs is in your best interest.
Have a Back-up Plan
In general, a deed-in-lieu of foreclosure has a very low probability of occurring. Because of the low success rate for deed-in-lieu approval, it’s important to know your options and develop a back-up plan should the lender decline your request or refuse to waive deficiency judgment. Ben helps clients prepare for “No” and develops a multi-pronged strategy that’s right for them – including short sale and strategic foreclosure.
Frequently Asked Questions
What does Deed-In-Lieu of Foreclosure mean?
A deed-in-lieu of foreclosure is where the property owner deeds or transfers the title of the property to the mortgage holder, typically a bank or lender. A deed-in-lieu is typically undertaken where the property is worth less than the loan amount and it is undertaken to avoid the foreclosure process. However, the lender may or may not cancel the debt in exchange for the deed. If the lender is unwilling to cancel the debt as part of the deed-in-lieu agreement, it may not be the best option.
How to do/get a Deed-In-Lieu of Foreclosure?
A homeowner can actually request a deed-in-lieu of foreclosure on his or her own. Simply call the bank and ask one of the lender gnomes, as Ben affectionately calls them, if the bank will accept a deed-in-lieu of foreclosure. If the bank says yes, have them initiate the deed-in-lieu evaluation process and/or prepare the deed-in-lieu documents. A final caution: the lender will ask for your financial information. You should speak with an attorney about steps you can take to organize your financials prior to speaking with the lender. his will reduce the risk that the lender will ask you to contribute to the deficiency. Therefore, we highly recommend that you contact a competent attorney before you call the bank to request a deed-in-lieu. Understanding how your financial situation may impact the lender’s decision-making will give you a greater chance of success. A foreclosure defense attorney can help you determine if disclosure of your financial affairs is in your best interest, and discuss the potential risks associated with such disclosure.
Once you receive the final paperwork – which usually includes a deed, an affidavit, a deed-in-lieu agreement and a move out agreement – we recommend having a competent attorney review the paperwork, particularly to determine if the bank is agreeing to waive deficiency judgment.
What are the requirements of a deed in lieu of foreclosure?
The minimum requirements for a deed-in-lieu of foreclosure are typically the lender’s approval and the homeowner’s ability to deliver a clear title. This often requires resolving second mortgages or other liens or judgments. Ben usually recommends that the lender also agree to cancel the promissory note or the debt associated with mortgage, as a condition of the deed-in-lieu of foreclosure agreement.
What is the benefit of deed-in-lieu of foreclosure?
The potential benefits associated with a deed-in-lieu of foreclosure include:
- Simpler process. A deed-in-lieu of foreclosure can be simpler than a short sale or foreclosure.
- Minimal attorney involvement. A homeowner can call the bank directly and request a deed-in-lieu of foreclosure with minimal attorney involvement. However, we do advise seeking legal counsel before you contact the bank and upon receipt of the final paperwork – so that you understand what you are signing.
- Shorter time frame. A deed-in-lieu of foreclosure can often be accomplished in a short period of time which in turn could minimize credit impact.
- Potential cash payout. Some lenders occasionally pay you cash to do it.
What are the consequences of a Deed in Lieu of Foreclosure? Will it affect my credit?
Potential consequences of a deed-in-lieu of foreclosure vary from case to case. As with any loan resolution where the lender is not being paid in full, there is often significant negative credit impact. And because the lender won’t usually accept a deed-in-lieu until you’re delinquent on your mortgage payments, missed payments will also have a significant impact on your credit score. However, beyond frequency of missed payments and credit history, your credit score also depends on the amounts owed, length of credit history, new credit and type of credit.
And, don’t forget the obvious consequence of deed-in-lieu of foreclosure: you have to find a new place to live.
