
A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, in addition to brief sales, loan modifications, payment strategies, and forbearances. Specifically, a deed in lieu is a transaction where the property owner willingly transfers title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.
Most of the times, finishing a deed in lieu will release the customer from all responsibilities and liability under the mortgage agreement and promissory note.

How Does a Deed in Lieu of Foreclosure Work?
Deficiency Judgments Following a Deed in Lieu of Foreclosure
Mortgage Release Program Under Fannie Mae
Should You Consider Letting the Foreclosure Happen?
When to Seek Counsel
How Does a Deed in Lieu of Foreclosure Work?
The initial step in getting a deed in lieu is for the customer to request a loss mitigation bundle from the loan servicer (the company that handles the loan account). The application will need to be submitted and sent along with documentation about the borrower's earnings and expenses including:
- evidence of earnings (usually 2 recent pay stubs or, if the debtor is self-employed, an earnings and loss declaration).
- recent tax returns.
- a financial declaration, detailing regular monthly income and expenses.
- bank declarations (generally 2 current declarations for all accounts), and.
- a challenge letter or difficulty affidavit.
What Is a Hardship?
A "hardship" is a scenario that is beyond the borrower's control that leads to the borrower no longer being able to afford to make mortgage payments. Hardships that get approved for loss mitigation consideration include, for example, task loss, decreased income, death of a partner, disease, medical expenses, divorce, rates of interest reset, and a natural disaster.
Sometimes, the bank will require the customer to try to offer the home for its reasonable market price before it will think about accepting a deed in lieu. Once the listing duration expires, presuming the residential or commercial property hasn't offered, the servicer will purchase a title search.
The bank will usually only accept a deed in lieu of foreclosure on a very first mortgage, implying there must be no additional liens-like 2nd mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this basic rule is if the same bank holds both the very first and the second mortgage on the home. Alternatively, a debtor can choose to settle any extra liens, such as a tax lien or judgment, to assist in the deed in lieu deal. If and when the title is clear, then the servicer will set up for a brokers rate opinion (BPO) to figure out the fair market value of the residential or commercial property.
To complete the deed in lieu, the debtor will be required to sign a grant deed in lieu of foreclosure, which is the document that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the arrangement between the bank and the customer and will consist of an arrangement that the debtor acted freely and voluntarily, not under browbeating or duress. This document might likewise consist of arrangements dealing with whether the deal remains in complete fulfillment of the financial obligation or whether the bank deserves to seek a shortage judgment.
Deficiency Judgments Following a Deed in Lieu of Foreclosure
A deed in lieu is typically structured so that the deal satisfies the mortgage financial obligation. So, with the majority of deeds in lieu, the bank can't get a shortage judgment for the distinction in between the home's fair market worth and the debt.
But if the bank wants to protect its right to look for a shortage judgment, a lot of jurisdictions permit the bank to do so by clearly specifying in the transaction documents that a balance stays after the deed in lieu. The bank normally needs to define the amount of the shortage and include this amount in the deed in lieu files or in a different arrangement.

Whether the bank can pursue a shortage judgment following a deed in lieu likewise often depends on state law. Washington, for instance, has at least one case that states a loan holder might not get a deficiency judgment after a deed in lieu, even if the consideration is less than a complete discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was successfully a nonjudicial foreclosure, the borrower was entitled to defense under Washington's anti-deficiency laws.
Mortgage Release Program Under Fannie Mae

If Fannie Mae owns your mortgage loan, you might be qualified for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is qualified for a deed in lieu has 3 choices after finishing the deal:
- vacating the home right away.
- participating in a three-month shift lease without any rent payment needed, or.
- getting in into a twelve-month lease and paying rent at market rate.
To find out more on requirements and how to partake in the program, go here.
Similarly, if Freddie Mac owns your loan, you may be qualified for a special deed in lieu program, which may include relocation assistance.
Should You Consider Letting the Foreclosure Happen?
In some states, a bank can get a shortage judgment against a house owner as part of a foreclosure or after that by filing a separate lawsuit. In other states, state law avoids a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a shortage judgment versus you after a foreclosure, you may be much better off letting a foreclosure happen instead of doing a deed in lieu of foreclosure that leaves you liable for a deficiency.
Generally, it may not deserve doing a deed in lieu of foreclosure unless you can get the bank to agree to forgive or reduce the shortage, you get some cash as part of the deal, or you receive extra time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific advice about what to do in your particular scenario, talk to a regional foreclosure legal representative.
Also, you should take into consideration for how long it will require to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for circumstances, will purchase loans made two years after a deed in lieu if there are extenuating scenarios, like divorce, medical bills, or a task layoff that triggered you economic problem, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting duration for a Fannie Mae loan is seven years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the very same, normally making it's mortgage insurance available after 3 years.

When to Seek Counsel
If you require help understanding the deed in lieu procedure or translating the documents you'll be needed to sign, you must think about talking to a qualified attorney. An attorney can likewise help you negotiate a release of your personal liability or a decreased shortage if required.
