Deed in Lieu of Foreclosure: When You're Going to Lose Your Home
By Gina PogolMortgage Credit Problems Columnist
You have fallen on hard times. You lost your job, or developed medical problems, or suffered through an expensive divorce. Now, you can't even come close to affording your mortgage payment. You can't refinance, and your lender won't restructure your loan. When even bankruptcy can't help you afford your mortgage, it's time to cut your losses.
When Foreclosure Seems Like Your Only Option
You were a happy homeowner until your life took a wrong turn. With no way to pay your mortgage each month, you attempted to find help. With inadequate income, you were unable to refinance, and your lender declined to restructure your loan for the same reason. You've tried selling your home but no one is interested in buying it. So what do you do now?
What Is a Deed In Lieu of Foreclosure?
A deed in lieu of foreclosure is an alternative to a foreclosure proceeding. It requires that you give up all your rights to the property, sign it over to your lender, and you are then released from your mortgage obligation.
When Will a Lender Accept a Deed In Lieu of Foreclosure?
Lenders are most likely to agree to a deed in lieu of foreclosure when it is obvious that you can't possibly make the mortgage payment and the property couldn't be sold for more than you owe. If it's worth more than the mortgage balance, the lender could foreclose, sell the property, and recover the balance on the loan plus the costs of foreclosure. When there is no way the lender will be able to recoup the costs of a foreclosure, it makes sense to accept a deed in lieu of foreclosure instead. This process takes place outside the court system and is therefore much faster and less expensive than foreclosing on the property. FHA loans have special rules, but in general if you meet HUD guidelines your FHA lender will accept your offer of a deed in lieu of foreclosure.
Avoiding Foreclosure: What's in it for You?
The biggest advantage to you is that on your credit report a deed in lieu of foreclosure isn't as bad as a foreclosure. Most lenders feel that foreclosure is the worst thing you can have on a credit report, and it will probably make your life even more difficult than it is already. First, the lender is likely to pass the high legal costs associated with foreclosing on to you. Second, you could be forced to surrender assets to your lender if you owe more than the property fetches in a foreclosure sale. Third, your other creditors may increase your interest rates because you will be perceived as a riskier borrower. So your credit card companies may increase your rate, even if you've paid them on time. Fourth, bad credit can keep you from getting a job or insurance, because statistically people with bad credit file more insurance claims and are less reliable employees.
Negotiating a Deed in Lieu of Foreclosure
Deeds in lieu of foreclosure are voluntary and take place outside the judicial system. That means there is room for negotiation. Ideally you would have a real estate attorney represent you in the transaction. If you don't negotiate, you could end up with the lender chasing after you for fees -- in addition to a foreclosure on your credit report. What you want ideally is a complete walk-away and a "paid-satisfactory" or at least "paid-settlement" on your credit report. The lender's reps may state that they can't do this but in fact they can.
When Your Lender Says No
Talk to them about a short sale. This involves you dropping your asking price and selling your home for less than the balance of the mortgage--with the lender accepting the proceeds as payment in full. Again, the idea is to keep a foreclosure off your credit report and make a clean break.
Sources:
American Chronicle
Federal Trade Commission
New York Times
US Dept of Housing and Urban Development
About the Author
Gina Pogol writes for an online media company and specializes in finance and mortgage issues. She formerly worked as a systems consultant with Experian and a mortgage consultant with Centex. She has a BS in financial management from the University of Nevada.
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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