The Deed in Lieu of Foreclosure
How to Stop Foreclosure by Giving the Property to the Lender
Oct 12, 2009
A deed in lieu of foreclosure is an agreement between the debtor and the creditor wherein the debtor agrees to give up the deed to the property in exchange for the mortgage lender's agreement not to go forward with a foreclosure. In theory, the debtor simply hands over the keys to the house and walks away free and clear. In reality, the process is a bit more complicated.
The Mortgage Lender Must Agree to Accept a Deed in Lieu of Foreclosure
As with the short sale option for avoiding foreclosure, the mortgage lender must first agree to accept a deed in lieu of foreclosure. Getting the mortgage lender to agree in writing to accept a deed in lieu of foreclosure might be a challenge to a debtor's goal of preventing foreclosure.
Deed in Lieu of Foreclosure Means the Lender Must Sell the Property
When the debtor "turns over the keys" to the lender, this means the lender now owns a home that it must sell in order to recoup its money. In contrast to a short sale situation, where the debtor is responsible for trying to find a buyer for the real estate, the creditor that agrees to a deed in lieu of foreclosure must find the buyer.
Most lenders would rather have cash than real estate. Thus, the mortgage lender may require the debtor to place the property on the market for a certain number of months prior to agreeing to the deed in lieu of foreclosure. This is particularly true if the local market is already flooded with foreclosed properties.
Mortgage Lender May Accept the Deed to Avoid Foreclosure Expenses
Even though most banks would rather have cash than real estate, mortgage lenders know that the foreclosure process costs money, especially if the property is located in a state that requires judicial foreclosure. With this in mind, the lender may be motivated to accept the deed to the mortgaged property rather than go through the time and expense of a foreclosure procedure.
Houses with Second Mortgages and Home Equity Loans
A second mortgage or a home equity loan on the property may hamper the debtor's ability to walk away from the debt through a deed in lieu of foreclosure. Second mortgages and home equity loans are subordinate to the first mortgage, and those lenders may be reluctant to allow the property to be given over in a deed in lieu of foreclosure on the first mortgage.
Deficiencies Should be Addressed in the Agreement with the Mortgage Lender
Before seeking a deed in lieu of foreclosure, the debtor should carefully consider whether he or she will still owe money to the lender even after turning over the deed. If the market value of the property is well below the amount owed, it is possible the lender could sue the debtor for the difference. It would be wise for the debtor to request an agreement with the lender wherein the lender agrees not to pursue any deficiency after the home is resold.
A Deed in Lieu of Foreclosure May Cause Income Tax Problems
If a great deal of debt is forgiven with a deed in lieu of foreclosure, this may present potential income tax problems for the debtor because the I.R.S. may consider forgiven debt as income. However, under the provisions of the Mortgage Debt Forgiveness Relief Act of 2007, forgiveness of indebtedness on one's qualified principle residence will not be considered income. Fortunately, this applies to most homeowners.
The Impact on One's Credit Score
The impact on the debtor's credit score may not be quite as severe with a deed in lieu of foreclosure as it would be with a short sale or a foreclosure. Although a deed in lieu of foreclosure may be considered a redeemed pre-foreclosure, many people believe that credit rating agencies distinguish between a deed in lieu of foreclosure for purposes of one's credit score.
Foreclosure Attorneys
A deed in lieu of foreclosure is a viable alternative to foreclosure that, depending upon all the circumstances, may save some grief for the debtor in default. A debtor seeking to avoid foreclosure in this manner should consult with a foreclosure attorney to discuss all the potential ramifications of a deed in lieu of foreclosure.
Disclaimer: This article is in no way intended as legal advice. For help with specific legal issues, one should contact a licensed attorney in one's own jurisdiction.
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