If a homeowner with a mortgage is no longer able to make payments and unable to get refinancing to lower monthly payments, there are several options: loan modification, short sale, foreclosure and deed in lieu of foreclosure.
With a deed in lieu of foreclosure, the homeowner requests and receives permission from the lender to sign the deed of the home over to the lender. The lender accepts the deed, absolves the debt and waives the right to seek additional money from the homeowner if the sale of the home doesn’t cover the loan.
The lender marks the borrower’s note as “paid” and provides the borrower with two documents – one which states that the debt is canceled and the other waives the lender’s right to a deficiency judgment (the lender’s right to ask for the amount of the debt they are unable to recover from the sale of the home).
In most cases, a deed in lieu of foreclosure is better than foreclosure for the borrower and the lender. The borrower gets out of debt that he cannot afford to pay and avoids foreclosure. Even the borrower’s neighborhood benefits as news of foreclosures, which are public record, lower surrounding home values. For the lender, a deed in lieu of foreclosure avoids the hefty costs of foreclosure proceedings .
While a deed in lieu of foreclosure can help relieve an immediate threat of default or foreclosure, a homeowner considering it should be aware of the following points:
You must approach the lender and the lender must agree. Even if it is a good option, a lender cannot approach a homeowner about giving up a home. Both parties must enter into the transaction voluntarily and in good faith.
Your equity is lost. Lenders are most likely to accept a deed in lieu of foreclosure when there is positive equity in the home. In a foreclosure, you remain the owner of your equity if there is value left over after the loan is paid. In a deed in lieu of foreclosure, it all goes to the lender.
There could be tax consequences. If the sale of the home does not cover the loan balance, you are being forgiven that amount. If the home is not your primary residence or the forgiven balance is above set amounts, you might face taxes on it.
Your credit history is affected. A short sale does not affect your credit standing. It is simply a sale of the home. And while a deed in lieu of foreclosure is not as big a black mark on your credit report as a foreclosure, it is still reported and still a part of your credit score calculations.When you go for deed in lieu of foreclosure, it affects your credit score. Your score could drop by as much as 250 points and will stay on your credit report for 7 years. After 7 years, you can have the deed in lieu removed from your credit report and start to rebuild your credit. At the end of the 7th year, you can request the bureaus to remove it from the report.
