Avoiding the process of being officially foreclosed upon is a benefit of deed in lieu of foreclosure. You avoid the time and costs involved in a forced repossession and avoid ending up with a foreclosure on your credit history. A deed-in-lieu negatively impacts your credit score, but less so than actually being foreclosed upon.
It is possible that, by signing your home over to your lender voluntarily, you will receive better terms than you would in the case of the lender forcing you out of your home involuntarily. If you are considering declaring bankruptcy, avoiding foreclosure proceedings may have additional benefits for you.
After you and your lender formally agree to the settlement and you follow the terms of the agreement, your lender cannot pursue you for any difference between the amount of debt cancelled and the actual sale price received for your home.
You may also receive some compensation, up to $2,000, from your lender after you vacate the property. This generally happens when there is some equity in your home.
Who Is Eligible for Deed in Lieu of Foreclosure?
Generally, a borrower must be in default and at least thirty-one days delinquent before using the deed in lieu of foreclosure option, though a lender has the ability to waive this requirement. With the exception of special circumstances, the borrower must be living in the property in question.
A borrower must document the circumstances leading up to the threat of foreclosure. Mortgage lenders may also require that your home has been listed for sale on the real estate market for a certain amount of time before you are eligible for this foreclosure avoidance option.
How Does the Process of Deed in Lieu of Foreclosure Work?
Once the process begins, it must be completed within ninety days. You will most likely need to provide your lender a written statement of your desire to enter into negotiations about a deed in lieu of foreclosure. This formality is often required because of the HUD's requirement that the borrower not be pressured into agreeing to this arrangement.
You and the lender will agree to a date when ownership of the property will be formally transferred from you to the lender. You will be required to provide a statement of the physical condition of the property as well as an itemization of the fixtures and keys you will be handing over to the lender. When you turn the property over, it must be empty of all furniture and other possessions. Your lender may also require you to prove that all utility costs or other applicable fees have been paid in full before transferring the property.
Problems You May Encounter
Essentially with a deed in lieu of foreclosure, you are exchanging possession of your home for the erasure of the debt that you owe your lender. Therefore, if the fair market value of your home is less than the amount that you owe on your mortgage, your lender may choose not to agree to a deed in lieu of foreclosure. If your lender might receive more money through a foreclosure, it may decide to pursue the official foreclosure.
Also keep in mind that this arrangement, as a canceled debt, may have tax consequences for you. The IRS may treat the amount of the loan forgiven as income to you. In some states you may qualify for an exemption from these taxes as a result of the Mortgage Debt Forgiveness Tax Relief Act.
Explore Other Options for Avoiding Foreclosure
Deed in lieu of foreclosure is not the most desirable option for avoiding foreclosure, as you will lose your home. It is more of a last-ditch effort to avoid foreclosure. In fact, HUD requires that any borrower pursuing deed in lieu of foreclosure must not qualify for any other HUD foreclosure avoidance option. Review the other options to
avoid foreclosure that are available before choosing to go forward with a deed in lieu of foreclosure.