What is Deed In Lieu of Foreclosure?
One of the ways to stop the foreclosure process, is with a deed in lieu of foreclosure. A deed in lieu of foreclosure is a transaction in which the mortgagor (borrower) voluntarily transfers the to the property to the mortgagee (lender) to satisfy a mortgage in default and avoid the foreclosure process and release from mortgage obligation. In most cases, the lender will not approve a deed in lieu of foreclosure if there are any other liens on the property.
Similar to a short sale, the borrower must contact their loan servicer’s loss mitigation department and request deed in lieu of foreclosure application. This form is filled out and submitted for review along with other financials to support income and expenses. Typically 2 years of income tax returns, verification of income supported by one month’s worth of paystubs, two months bank statements and signed federal tax returns as well as hardship letter.
A deed in lieu is a process lenders may allow to alleviate costly litigation and is a great alternative for those just looking to walk away from the property in lieu of litigation. Borrowers may or may not be liable for losses incurred from the sale of the home. Those inexperienced in the process may settle for unfavorable terms requiring borrowers to be liable for a portion of all or some of the losses. At the Law Offices of Jeffrey A. Avny in Mount Prospect, Illinois, we negotiate with lenders to arrange a favorable situation and help minimize losses for our clients.
In some cases, lenders may typically try to get borrowers to accept liability for deficiencies on the property. The deficiency amount is the difference between the what the property sells for and the total debt including mortgage, interest, taxes, insurance, necessary repairs, legal fees or commissions. Since most people giving their houses back to the banks, are struggling financially, being on the hook for any deficiency is a losing proposition.
How to Avoid Deficiency Judgement with a Deed in Lieu of Foreclosure
To avoid any personal liability with a deed in lieu of foreclosure, it is best to get the lender to agree to complete release of any liability in writing on the actual agreement and state that the transaction is in full satisfaction of the debt. Deed in lieu of foreclosure agreements signed without this provision may result in further lawsuit where your lender seeks a judgement of deficiency.
Similar to a short sale, those involved with a deed in lieu of foreclosure may be liable for tax consequences on monies the lending institution faces. The Mortgage Forgiveness Debt Relief Act of 2007 may exclude tax liabilities. Please consult a CPA for tax advise, the materials prepared on this website are for illustration purposes only and not to be construed as legal advice.
Approved Deed in Lieu of Foreclosure
Upon approval of a deed in lieu of foreclosure, your lender will send you a package of documents to sign including the Deed in Lieu of Foreclosure Agreement. This agreement transfers the ownership of the property over to the lender and includes an estoppel affidavit. An estoppel affidavit spells out the terms of the agreement and includes whether or not the lender has the right to recoup their losses in the form of a deficiency judgement.
How does a deed lieu affect your credit score?
In general your credit score may decline as much as a foreclosure. While the long term impact on your credit score will not be as severe as having a foreclosure or short sale on your credit report. It is always better to address the problem upfront rather than avoiding it.
If your deed in lieu of foreclosure was negotiated successfully and your lender does not report not a deficiency balance, it will be more favorable on your credit report. This in essence will make it easier when applying for credit down the road. For help negotiating your deed in lieu of foreclosure, contact our office by dialing 847-398-4793.
How long does a deed in lieu of foreclosure stay on your credit report?
Having any derogatory remark on your credit report will generally last seven to ten years. As a side consequence, you may not be eligible for another mortgage for two to three years, unless the event was due to extenuating circumstances. In general, while your credit score may decline as much as in a foreclosure, the overall negative effects are usually lessened. exchange for being absolved of all obligations associated with it. In other words, a lender agrees to essentially take back the home.