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Deed in Lieu
Deed in Lieu of foreclosure allows the borrower to transfer legal ownership of a home or property to the lender. In return, the lender agrees not to foreclose on the home. Legally, the deed in lieu of foreclosure terminates the liability of the borrower for the mortgage payment. The terms and conditions, in which the agreements are made, however, can be negotiated.
Deed in lieu of foreclosure agreements are commonly used when attempts to renegotiate mortgage payments with the lender have failed, the lender is not willing to accept a short sale, a bankruptcy may not stop the foreclosure, and the homeowner prefers to responsibly deal with issue.
Like a short sale, however, whether or not the lender will accept a deed in lieu of foreclosure is at the discretion of the lender. It is not a fundamental right of the homeowner.
Benefits of a deed in lieu of foreclosure
Both the lender and home or property owner can benefit from the deed in lieu of foreclosure.
Advantages for the lender:
- The lender avoids foreclosure and takes immediate control of the property.
- The process is quickly completed and negotiated, avoiding a protracted foreclosure.
- The lender avoids the expense, time and publicity of foreclosure.
Advantages for the borrower:
- The borrower is released from the obligation to pay the mortgage.
- The borrower can avoid the expense, hassle and publicity of a foreclosure.
- The borrower may, under specific conditions, have the deficiency balance forgiven. This is not guaranteed and could depend on the agreement negotiated with the lender or a state's laws.
Disadvantages of a deed in lieu of foreclosure
Homeowners who are considering a deed in lieu of foreclosure should understand the disadvantages. First, there may be a set time limit for completing the deed-in-lieu of foreclosure.
Additionally, some states allow the lender to sue and receive a deficiency judgment if the house sells for less than the original loan amount. In this case the homeowner would not only lose the house, but they may still owe the lender a significant amount of money after the home has sold.
Homeowners who have second mortgages on their homes may also have a more difficult time convincing two lenders to agree to take financial loss.
Tax liability may also be an issue for some borrowers. Although the Mortgage Forgiveness Debt Relief Act and Debt Cancellation law may help some homeowners if it extends through the time period in question, some homeowners may owe taxes on forgiven debt. Talk to a tax lawyer if you have questions about your tax liability.
Finally, some borrowers believe that a deed in lieu of foreclosure may save their credit score, but the truth is the negative hit for your credit score is similar to a foreclosure. In fact, it's likely your credit score could dip 85 to 160 points following your deed in lieu of foreclosure.
On the up side, if you do decide to use a deed in lieu of foreclosure, it can tell future lenders that you may not have been able to pay your mortgage payments but you were willing to take responsibility for your financial issues and not force the lender through a protracted, expensive foreclosure process.