A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, in addition to short sales, loan modifications, repayment plans, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner voluntarily moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank concurring not to pursue a foreclosure.

In many cases, completing a deed in lieu will launch the debtor from all obligations and liability under the mortgage contract 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 primary step in getting a deed in lieu is for the borrower to request a loss mitigation bundle from the loan servicer (the business that manages the loan account). The application will require to be filled out and submitted together with documents about the borrower's income and expenditures consisting of:

- proof of earnings (generally 2 current pay stubs or, if the debtor is self-employed, a revenue and loss statement).

• current tax returns.
• a financial statement, detailing monthly income and expenses.
• bank statements (generally 2 current declarations for all accounts), and.
• a hardship letter or difficulty affidavit.
  
  What Is a Difficulty?
  
  A "challenge" is a circumstance that is beyond the customer's control that leads to the debtor no longer being able to afford to make mortgage payments. Hardships that get approved for loss mitigation factor to consider include, for instance, job loss, lowered income, death of a partner, disease, medical expenses, divorce, rate of interest reset, and a natural disaster.
  
  Sometimes, the bank will require the customer to attempt to sell the home for its fair market value before it will think about accepting a deed in lieu. Once the listing period expires, assuming the residential or commercial property hasn't offered, the servicer will buy a title search.
  
  The bank will generally only accept a deed in lieu of foreclosure on a first mortgage, implying there need to be no extra liens-like 2nd mortgages, judgments from financial institutions, or tax liens-on the residential or commercial property. An exception to this general guideline is if the same bank holds both the first and the second mortgage on the home. Alternatively, a customer can select to pay off any extra liens, such as a tax lien or judgment, to facilitate the deed in lieu deal. If and when the title is clear, then the servicer will schedule a brokers price viewpoint (BPO) to identify the fair market worth of the residential or commercial property.
  
  To finish the deed in lieu, the customer will be needed 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 terms of the contract in between the bank and the debtor and will consist of a provision that the borrower acted freely and willingly, not under coercion or duress. This file might likewise include provisions addressing whether the transaction is in full 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 often structured so that the transaction pleases the mortgage financial obligation. So, with a lot of deeds in lieu, the bank can't get a shortage judgment for the distinction in between the home's fair market value and the debt.
  
  But if the bank wishes to maintain its right to seek a deficiency judgment, the majority of jurisdictions permit the bank to do so by clearly stating in the deal files that a balance stays after the deed in lieu. The bank generally needs to define the quantity of the deficiency and include this amount in the deed in lieu files or in a separate agreement.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu likewise sometimes depends upon state law. Washington, for example, has at least one case that specifies a loan holder might not acquire a shortage judgment after a deed in lieu, even if the factor to consider 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 due to the fact that the deed in lieu was efficiently a nonjudicial foreclosure, the debtor was entitled to protection under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you may be eligible for its (deed in lieu) program. Under this program, a borrower who is eligible for a deed in lieu has three options after finishing the transaction:
  
  - vacating the home right away.
• participating in a three-month shift lease without any rent payment required, or.
• participating in a twelve-month lease and paying lease at market rate.
  
  To learn more on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be qualified for an unique deed in lieu program, which may consist of moving help.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a deficiency judgment versus a homeowner as part of a foreclosure or after that by filing a different lawsuit. In other states, state law prevents a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a shortage judgment against you after a foreclosure, you may be much better off letting a foreclosure occur rather than doing a deed in lieu of foreclosure that leaves you accountable for a deficiency.
  
  Generally, it might not deserve doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or decrease the deficiency, you get some money as part of the deal, or you receive additional time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific guidance about what to do in your particular circumstance, talk with a regional foreclosure legal representative.
  
  Also, you should take into factor to consider how long it will take to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will purchase loans made two years after a deed in lieu if there are extenuating situations, like divorce, medical costs, or a job layoff that triggered you financial problem, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting duration for a Fannie Mae loan is seven years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, short sales, and deeds in lieu the exact same, usually making it's mortgage insurance coverage available after three years.
  
  When to Seek Counsel
  
  If you require help comprehending the deed in lieu procedure or translating the files you'll be needed to sign, you should consider seeking advice from a qualified attorney. A lawyer can also help you negotiate a release of your individual liability or a reduced shortage if required.