Getting behind on mortgage payments can cause a lot of anxiety as homeowners come to the realization that they run the risk of losing their home to foreclosure. A foreclosure comes with a host of negatives, which may include a poor credit rating, having to pay the difference between the amount of money owed on the home and the amount it actually sells for and being taxed on the difference even if it is forgiven. You may think you are out of options and have to let the bank follow through on the process, but there are other options. One such option is a deed in lieu of foreclosure.
What Does It Mean to Sign a Deed in Lieu of Foreclosure?
Essential a deed in lieu is when the borrower expresses interest in a settlement with the lender. If the borrower qualifies, they come to an agreement and all of the proper paperwork is completed by the bank, the borrower signs over the deed to the bank and walks away debt free. It completely satisfies the loan, leaving no deficiency or taxes to pay once the deal is done.
Benefits for the Borrower
Possibly the best benefit for a borrower in agreeing to a deed in lieu of foreclosure is to avoid foreclosure. Even if your mortgage is already in default and headed towards a foreclosure sale, you have the option of choose a deed in lieu to satisfy the bank and prevent the home from selling for far less than its worth. It is also less damaging to your credit than a foreclosure is. The disadvantage is that you would lose that home, but you would also lose it if it were foreclosed upon.
Advantages and Disadvantages for the Lender
Borrowers aren’t the only ones who benefit from a deed in lieu. Lenders are able to reduce the time and money spent on foreclosing on the property. They also have a lower risk of vandalism to the property since the borrower will likely live in the home until the deed is signed and they walk away with a settlement deal rather than having their home taken from them. The other advantage is that the borrower won’t claim bankruptcy. The disadvantage for lenders, however, is that they will need to take care of any existing liens of judgments, as a clear title is needed to proceed.
How to Qualify for a Deed in Lieu of Foreclosure
Both parties enter into the agreement in good faith. It all starts with a letter of intention from the borrower. The negotiation process then begins. At that point you’ll need to gather documents, including a current payoff statement, an updated appraisal proof of income, income tax returns and proof of a financial hardship. The lender will need a clear title and a broker’s opinion of value to determine the fair market value of the home.
Ultimately, a formal settlement agreement needs to drafted and signed by both parties. Lastly, you’ll sign a grant deed to complete the deal. The entire process can take up to three months, compared to a year or more for a foreclosure sale.
When it’s Not a Good Idea to Get Deed in Lieu of Foreclosure
If there are junior liens on the mortgage, then it’s not a good idea do follow through with a deed in lieu. Lenders will avoid this situation so they don’t have to take on the added responsibility and expense of these outstanding liens.
A deed in lieu of foreclosure can potentially benefit both parties involved. Although it’s not easy to hand over your home, it can provide a relief to be able to walk away from a house you can no longer afford and have the opportunity to start fresh.