If keeping up with payments on your dream home is difficult, and you don’t know where to turn, you may want to consider a deed in lieu of foreclosure. Foreclosure is an unpleasant experience that no homeowner wants to face. Luckily, some alternatives are available that can help put the homeowner’s mind and wallet at ease.
Sometimes it seems like the entire country has been caught up in the mire of the real estate bust of 2008, with many once-proud homeowners are still struggling to keep their properties even years later. Keeping a home may be impractical or even impossible, especially if you have medical problems, or have been laid off.
Offering a deed in lieu of foreclosure to your mortgage company might be the best alternative if you can’t keep up payments or are not able to sell. There are several advantages to it, and we’ll cover the most important ones.
The definition of a foreclosure is the legal process that a bank or mortgage lender uses to repossess a home for lack of payment. During a foreclosure, the bank releases a public notice to your county offices that it’s suing you for default. In some states, you may find a notice of default tacked on your front door.
Your home will then go to public auction, with hopes that a cash buyer will step forward and purchase the home for the amount owed. This rarely happens. Most cash buyers are looking for a bargain to flip.
Fortunately, homeowners can take multiple steps before foreclosure becomes necessary.
If death, divorce, medical issues, or even unemployment leave you unable to make payments, talk to your lender about a repayment option for catching up or a loan modification that will make it possible to make timely payments.
When Loan Modification Isn’t an Option
If there is absolutely no way you can continue making payments on your home, you can try a few other strategies.
Sell your home
In the best circumstances, you can sell your home before foreclosure becomes imminent. Consult with a local Realtor to get a realistic idea of its market worth. If your home is sufficiently worth more than you owe to the lender, selling it could be the best option, and you could make a small profit.
If you owe more on the home than you can sell it for, you can try to negotiate a short sale with your lender. A short sale happens when your lender allows you to sell your home for less than you owe.
Why do you need the bank’s permission? Well, although we refer to it as “home ownership,” the fact is that in most cases, the bank owns your home, while you own it in spirit. As time goes on, and you make payments, you begin to own more of your home than the bank does. This is known as “equity.” Until your loan is paid off, the bank holds a lien on your home for the balance of the loan.
Deed in lieu of foreclosure
A deed in lieu of foreclosure is the name of the action taken when you release all interest in the property to the bank with the stipulation that they will not foreclose on the property. A foreclosure can be a messy business, and some people feel humiliated by the process. Even a short stale can be an embarrassment, as an army of strangers straggles through your home while you pack your belongings to vacate. If the bank doesn’t offer loan modification and won’t permit a short sale, a deed in lieu of foreclosure could be your best option.
What does in lieu mean?
In lieu essentially means “instead of,” and a deed in lieu of foreclosure refers to the bank taking possession of the deed to the home instead of foreclosing.
The Benefits of Deed in Lieu of Foreclosure
It’s possible to offer your lender a deed in lieu even if you’re not behind on payments. Some homeowners might choose this option after the unexpected death or disability of one of the owners. And along with avoiding the shame of foreclosure, it can be advantageous to both parties.
The first advantage to the borrower is that it releases them from financial obligations to the property. Other benefits are that sometimes the homeowner can lease the home from the lender for a short while, negating the emotional and economic turmoil of a quick relocation. And in some cases, the borrower receives relocation money after the deed in lieu is accepted. Lastly, and maybe most importantly, a deed in lieu transaction has less of an adverse effect on credit ratings than a foreclosure.
A deed in lieu of foreclosure affects your credit for two or three years in most cases. A foreclosure, similar to bankruptcy, affects your credit rating up to seven years. In some instances, the borrower can stipulate no negative reporting to credit agencies as part of the deal.
On the lender’s part, foreclosure is an expensive and lengthy process to pursue. Depending on how much the home is worth, the lender may not receive as much for it at auction as it would as a bank-owned property. The foreclosure process can take a very long time, which includes the three to six months the borrower is unable to make payment, the grace time borrowers get by law before an auction, and the time to sell after repossession. During this time, the lender isn’t getting any cash flow. In a deed in lieu transaction, depending on negotiations, the lender can take over the property and rent or sell it much sooner, improving cash flow and reducing legal costs.
How to Proceed with the Deed in Lieu of Foreclosure Process
First, consider whether a deed in lieu is the best option for you and your situation. If you’re facing default and long-term financial hardship, it may be the best option. If you believe it will be impossible to catch up and then keep up house payments, a deed in lieu has advantages. Should you be unable to sell because of distance or health, or an underwater mortgage, you may also consider it a good option.
If it looks like foreclosure is looming in the near future, contact your lender about the possibility that they would allow a deed in lieu of foreclosure agreement. You should also contact an attorney in your area that deals with foreclosures. Each state’s laws and processes vary.
An experienced attorney will be able to negotiate a deal in your interests. A deed in lieu of foreclosure can be a flexible legal instrument, and it’s best to have someone experienced on your side. A lawyer may be able to negotiate resettlement funds, the release of second mortgages or liens, a short-term lease before relocation, or other options of which you may not be aware.
How long does a deed in lieu take?
Depending on the deal you’ve negotiated with your lender, this can be anywhere from 30 or 60 days to several months. As stated above, sometimes the borrower can lease the property for a short time, giving them more flexibility in relocating. This is why hiring an attorney is a good idea. In the absence of a lease agreement, expect to have one to two months to vacate.
How to obtain a release of mortgage after offering a deed in lieu of foreclosure
The definition of a release of mortgage is the document (deed) your lender provides showing you’ve made every payment at the end of your contract, and your home is yours. Often this is confused with the Mortgage Release™ program, which is one of several Fannie Mae programs that can help home buyers manage their property finances. In this case, Mortgage Release™ is the trade name they use for what basically consists of a deed in lieu of foreclosure process. If you have a Fannie Mae home loan, there are some distinct advantages to this program:
- Eligibility for relocation assistance from $3,000 to $10,000 dollars depending on location;
- Ability to obtain another Fannie Mae home mortgage in as little as two years, and
- Flexibility in the time given to vacate the home.
Is Offering a Deed in Lieu the Right Step for You
The loss of one’s home is often a sad experience, whatever the reason. Whether it’s due to death, divorce, or financial hardship, it’s a hard thing to face. Even if you’re moving on to bigger and better things, it’s still sad to realize that it isn’t your home anymore.
The one advantage to deed in lieu of foreclosure is that, whatever the reason, you still have some control of the process. The borrower must offer a deed in lieu to the lender, which puts some control of events in your hands. So, even if other circumstances are beyond your ability to control, this one isn’t. Rather than face foreclosure – a process managed by the lender and under their terms – offering a deed in lieu of foreclosure can provide a graceful exit from unhappy circumstances.
Featured Image: CC by 2.0, by Jeff Turner, via Flickr