Understanding a Deed in Lieu of Foreclosure

Deed in Lieu of Foreclosure

It is easy for anyone to find themselves in financial distress which results in a lot of stress. Various factors contribute to a financial crisis including medical debt, loss of a job, death, divorce, or a necessary and rushed relocation. 

Unfortunately, when you own a home, financial distress can include the possibility of finding yourself in foreclosure. Facing the threat of foreclosure is scary and learning your options is essential for you to come out in the best possible way at the end of the process. One possible solution is a deed in lieu of foreclosure. 

This may sound complicated, but the easy definition of deed in lieu of foreclosure: a homeowner deeding their home back to their lender to avoid foreclosure. If this is handled correctly, a deed in lieu of foreclosure can be a pretty easy process and help a homeowner get out from under a lot of debt and a home they can no longer keep. It is extremely necessary that this process is handled correctly so in the end you are not left with a debt on your hands. 

Know Your Options

Know your options

A deed in lieu of foreclosure is not for everyone, and some homeowners may seek out other options. There are other options when you are facing foreclosure. Here are a few listed briefly:

Short Sale: A short sale occurs when a homeowner negotiates with the lender a payoff amount that is less than they owe. The homeowner sells the home for the highest price they can receive, and all of the money goes toward paying the lender off an amount that is less than what is owed. 

Loan Modification: A loan modification can also be negotiated with the lender in which the loan is restructured. This may include a newly arranged monthly payment amount, a possibility of skipping a payment or any other changes in terms of the initial loan. 

Chapter 13 Bankruptcy: This is a debt restructuring plan. New terms will be negotiated in regard to repayment. 

If you decide to walk away from the home instead of reviewing your options and taking action, your credit will feel the impact negatively. Besides, you could still end up with a lot of debt if your lender decides to pursue you for any balances you still owe since you did not negotiate any terms for payoff. 

A deed in lieu of foreclosure is a chance to negotiate with your lender to eliminate or reduce the amount of money you still owe on your mortgage. In some cases, lenders will offer incentives to enter into a deed in lieu leaving you with a little nest egg to find your new home. 

Even though you may behind in payments, you still have a property that is considered an asset which in turn, gives you a little bit of leverage to work with. Foreclosures can take a long time and in many states they are expensive. Lenders would rather not spend the money and time on a foreclosure. The hassle of the process itself along with evicting the homeowner may not be financially rewarding in the end for the lender. 

The sooner you work with your lender, the better. Lenders don’t like to worry that a homeowner in despair may damage the property, leave the property vacant, or take valuables within the home that will lessen any resale value for the lender. Therefore, lenders will often weigh out their options and be willing to work with homeowners to find a good solution, which just may be a deed in lieu of foreclosure. 

Just remember, it is risky to go the process alone. There are legal documents and contracts involved within the deed in lieu process. Language is very important as well as the terms you agree to. The Secretary of Housing and Urban Development (HUD) offers counseling in matters of foreclosure options. Or, you could contact an attorney as well to assure your deed in lieu is done correctly. 

Why a Deed in Lieu Might Be Right for You

There are several advantages to a deed in lieu of foreclosure. 

Avoid or Lessen Deficiency Debt: The lender will ultimately take a loss in a deed in lieu. The difference between the current fair market value of your home and the balance of what you still owe is considered the deficiency debt. Lenders within many states can pursue a borrower for this amount. However, under the agreement for a deed in lieu, this can be negotiated within the terms so the deficiency amount could be eliminated or reduced. 

Possible Moving Assistance: There are programs that lenders will partake in which a homeowner will receive a payment for entering into the deed in lieu agreement. In some cases, this practice is called “Cash for Keys”. The money you receive could help you with your relocation costs. 

May Not Hit Your Credit as Hard: A foreclosure affects your credit negatively and it follows you for quite some time. Any time you settle a debt for less than you owe, it will ding your credit score, however, it will be less severe than a foreclosure. A deed in lieu of foreclosure will hinder your ability to purchase a new home with a lender for up to four years, but a full foreclosure comes with a seven year wait to get a new mortgage. 

The Downsides of a Deed in Lieu of Foreclosure

Downsides of Deed in Lieu

With any arrangement, there are downsides to a deed in lieu of foreclosure. The lender is under no obligation to agree to a deed in lieu. Also, some mortgage agreements may not be eligible for a deed in lieu of foreclosure. It is possible if you owe too much, the lender may not negotiate elimination of the debt and require you to pay more than you were hoping. 

If your home is in poor condition, the deed in lieu may be more difficult to negotiate. A lender is more apt to agree to a deed in lieu if a home is in good condition because they need to take into consideration what they can sell the property for after the agreement is complete. Also, if you have more than one mortgage, a deed in lieu will involve much more leg work. The other mortgage lender(s) will have to agree to release their lien on the property which may or may not be agreeable. 

Another possible issue with a deed in lieu of foreclosure is possible tax consequences. Because some of your debt will be forgiven by your mortgage lender, the IRS will consider that forgiven debt as income. That taxable amount is your total debt on the loan in question at the time it was forgiven by the lender minus the fair market value of the home at that time. So, if your home is worth $140,000, and your deed in lieu arrangement was $160,000.00, then you may owe taxes based on the balance of $20,000.

How to Get Help

There are numerous resources for homeowners in distress. Whether you want to pursue a deed in lieu of foreclosure, short sale, loan modification, or a bankruptcy, you can contact certified counselors through the Secretary of Housing and Urban Development (HUD). They are trained to help homeowners navigate their ideal solutions. 

You can also contact a bankruptcy attorney, a legal clinic or a foreclosure defense attorney. However, these will all cost money and if you are tight on funds, this might not be an option. If you find yourself in a situation where you are not sure what to do next, you may want to consider selling your home quickly for cash. 

We are a property solutions company in Massachusetts here to help homeowners who need to sell their property quickly for a variety of reasons. We provide fair cash offers and guide you through every step along the way. 

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