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Deeds In Lieu Of Foreclosure: What You Need To Know

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Deeds In Lieu Of Foreclosure: What You Need To Know

Mortgage basics start with the fact that you have to pay your mortgage every month.

The unfortunate fact is that life happens, and circumstances can make staying current with your mortgage impossible. If this is your situation, you may think that foreclosure is the only option that you have.

Maybe you don’t know what a deed in lieu of foreclosure or a short sale are. Both of these are basic mortgage options that do less damage to your credit than a foreclosure or bankruptcy does.

Deeds In Lieu Of Foreclosure

Simply handing over the keys to your house to the lender may or may not work. You have a legal obligation to repay the loan and not to simply walk away from your obligation.

Selling your house is one way to repay the loan. If the house is worth less than what you owe, a short sale might be possible.

Either handing over the keys or a short sale only benefits you when the lender agrees it's the best answer for you and the mortgage company.

The circumstances can be very severe by the time you're asking about a deed in lieu of foreclosure.

You’re typically financially in arrears by much more than a payment or two. Total costs can include payments of principal and interest together with late charges, attorney’s fees, foreclosure fees, inspection fees and other costs the lender has.

You might also be delinquent on a second mortgage. Your financial situation has become overwhelming.

The Process Made Simple

The devil is in the details, of course, but here is the deed in lieu of foreclosure process in its simplified form: 

  • Contact your lender’s loss mitigation department to request a deed in lieu of foreclosure package.
  • Complete and submit the package back to them. This is where most of the details are.
  • The lender might order a broker price opinion or an appraisal of the house.
  • After the lender receives the broker price opinion, they will likely approve the deed in lieu of foreclosure.
  • The lender will send you another package of paperwork that includes the grant deed, a deed in lieu of foreclosure and an agreement that spells out the terms of any additional money you will owe and how your credit report will be affected.
  • You review and sign these documents, have them notarized and return them to the lender.
  • On a prearranged date that comes quickly, you vacate the house and turn the keys over to the lender.
  • You are free and clear to move on with your life without the burden of an unmanageable mortgage holding you back.
  • You should be thinking about a few important issues as you move through this process. 

The Two Biggest Issues 

1. Your house might be worth less than what you can sell it for on the open market. That means the lender will also receive less than what you owe on the mortgage they lent to you.

You have to assume there will be a deficiency when they finally sell the house.

Your future responsibility or lack of it needs to be clearly spelled out in the deed in lieu of foreclosure agreement letter.

2. The other big reason you are behaving responsibly instead of waiting for the sheriff to force you out is that you expect the lender to reciprocate by not damaging your credit history.

Neither of these actions is automatically defined by a deed in lieu of foreclosure. You have to specifically request what you want, and you might have to negotiate and reach an agreement that's a bit short of exactly what you want. 

Lenders Act Because It’s In Their Best Interest

If you owe more than the house is worth and you stay in it until foreclosure is completed without paying the mortgage payment, a lender must do the following: 

  • They will have to go through foreclosure.
  • They have to pay all the costs and fees associated with foreclosure.
  • They will have to get you out.
  • If you are an irresponsible occupant, the place could be trashed.
  • They have to clean up the house and fix it up.
  • The house will probably be worth even less by then.

The bottom line on deeds in lieu of foreclosure: it's a process that best serves both you and the lender under certain circumstances.

 

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