Deed in Lieu of Foreclosure

A deed in lieu of foreclosure requires the borrower to relinquish his or her rights in a property to the lender in exchange for being released from liabilities specifically named in the loan documents; a deed in lieu of foreclosure can often be the result of a settlement. The borrower is freed from having a foreclosure on his or her credit history.

This legal transaction starts after the homeowner has fallen behind on his loan payments and is in foreclosure. Even if the foreclosure has not started yet, the lender can be approached and asked if they will accept a "deed in lieu of" continuing into the foreclosure process. Sometimes the lenders regulations require the homeowner to be behind on his payments before they will consider accepting the deed, usually 90 days in judicial foreclosure states and 30 days in non-judicial states.

In order to obtain a deed in lieu of foreclosure, both the financial lender and the homeowner must agree to sign over the title of the deed to the lender. In other words, the financial institution will now own the home in question. In return the original homeowner is relieved of paying back the debt still owed on the home. The homeowner in default have no more liabilities in regards to the said house, and by procuring this agreement with the lender, the deed in lieu of foreclosure will not affect the homeowner's credit rating like a traditional foreclosure would. The agreement to go for the deed in lieu of foreclosure must be made at the start of the foreclosure process. The deed in lieu of foreclosure is an out of court settlement.

The bank or lending institution will most often opt for a deed in lieu of foreclosure when the debt is so great that the homeowner cannot pay it. It would not be worthwhile for them to seek a deficiency judgment, which is a court order to recoup part of the outstanding debt related to the foreclosure. They normally follow through with the actual foreclosure when the debt isn't as much as the value of the property.

Pros / Positives

The biggest positive of the deed in lieu of foreclosure is that our credit doesn't suffer as much as it would if it displayed a foreclosure. A foreclosure looks really bad on our credit and it can stop us from being able to buy another home for at least 10 years. No one wants a foreclosure on our credit. Being able to avoid this is a really good thing.

The deed in lieu has another positive aspect that it can happen quickly. The quicker we are released from our mortgage payments each month then the less we owe on the back payments and penalties for late fees. Many banks forgive the penalties, late fees, and back payments while others will come after us for it. The quicker we sign over the title of the house the less money you may owe.

Cons / Negatives

Some people look at the time factor as a bad thing. The sooner we sign the title over in a deed in lieu of foreclosure means the sooner we have to move out of the house. Some people live in their home up until the day the sheriff's office comes to evict them out. This can be up to a year of free rent in a place. A deed in lieu needs to take place quickly upon realizing you cannot sell your home.

The bank also has a requirement for people who want to sign over the title to their home for a deed in lieu of foreclosure. This requirement is that you attempt to sell the house first. You will have to register the home with a real estate agent. You might have to pay for an appraisal and fees for an agent. If you don't have any money this may be tough for you to get through the process of working with the bank.

One of the things we must think about is that we cannot be eligible for a deed in lieu of foreclosure if there are any liens on the property. If there are liens on the property, there is no way we can be able to avoid the foreclosure unless we pay up the back payments we have missed on and keep the home. Chances are good you are looking forward to a legal battle also if there are liens.

The benefit to the original homeowner is that the record of foreclosure will not be recorded on their credit history.

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