What Is a Deed in Lieu of Foreclosure?
If you are facing foreclosure because of missed payments, you may be considering a deed in lieu of foreclosure. This is a popular way for clearing some of the debts to the lender. But what is this agreement? In this article, we will answer not only this but many more questions you may have.
A deed in lieu of foreclosure is a document that transfers the ownership of a house or certain asset from its owner to the lender. It is generally only used when the borrower is facing financial difficulties and is incapable of paying their mortgage debts. The deed in lieu typically takes place after the borrower tried but failed to pay several monthly payments which force the lender to initiate this procedure to recoup their loss.
The meaning of a deed in lieu agreement is for a homeowner to voluntarily convey ownership rights of an asset to the person or institution that borrowed them money. This is done in exchange for forgiving the outstanding mortgage balance. It’s an alternative to foreclosure that can sometimes be beneficial for both sides.
If you ever get to the point where you are considering this process there are a few things to keep in mind. First, lenders frequently will decline this deal and accordingly, will prefer foreclosure. Second, even if the lender does accept, it will still lower your credit score which will impact your ability to get a new loan later. And finally, most of the time it won’t free you completely of mortgage debt, and you will still be responsible for any outstanding balance.
If you’re facing foreclosure, it’s important to look for an experienced real estate attorney which can give you guidance and help you in this situation.
How Does a Deed in Lieu of Foreclosure Work?
Most commonly, when a borrower is unable to pay their mortgage, they will try to find an alternative solution. This can often be a deed in lieu of foreclosure because it will release the borrower partially or completely from the debts.
The borrower will need to give up the ownership of the asset and transfer them to the person or institution that provided the loan. The lender will then forgive a certain part of the loan or all of it, but that’s up to them.
Deed In Lieu Vs. Foreclosure: What’s The Difference?
If you’re missing the payments and foreclosure seems unavoidable, you may be wondering if a deed in lieu of foreclosure is a better option. But let’s first take the time to discuss what are some differences between deed in lieu and foreclosure so you can get a clearer picture.
A deed in lieu is when the borrower made an agreement with the lender. The lender agrees to reduce the debts or cut them completely and becomes the owner of their property in exchange. This whole process is voluntary, and the lender and borrower can negotiate on this.
This is different from foreclosure because when foreclosure occurs the lender automatically becomes the owner of the property and you don’t have any say in it or any opportunity to negotiate. As we already mentioned, the foreclosure stays in your credit history for 7 years as opposed to just 4 with the deed in lieu.
One advantage of a deed in lieu vs foreclosure is that it can help you significantly reduce the consequences that come with foreclosure which will affect your credit score.
Pros and Cons of Deed in Lieu of Foreclosure
Before making any decision, it’s essential to weigh out the pros and cons and determine if this is a wise move on your end.
- A faster way to get out of extreme debt that you currently have no way out of.
- This will reduce the amount you need to pay on the loan or remove it completely.
- It will not have as negative an impact on your credit score as the foreclosure will. It will still stand as a negative mark on your reports, but instead of “foreclosure”, it will be “settled”.
Some of the deed in lieu of foreclosure consequences will include:
- Still have some negative impact on your credit score.
- You will have to transfer ownership of assets to the lender, and you cannot gain it back.
- May not clear your debt completely. You could still owe some amount of debt to the lender.
- The lender may require you to sign a promissory note for the balance of the loan left, so you will need to fit it into your budget.
Is a Deed in Lieu of Foreclosure a Good Idea?
When the borrower is threatened with foreclosure, it can be a good idea to try and find an alternative. Deed in lieu of foreclosure can offer several benefits to both parties. The main advantage for the homeowner is that it immediately releases them from the indebtedness associated with the current loan.
And advantages for the lender include a decrease in time and cost of repossession and it allows them to close the deal a lot quicker and spend less money in the process.
One potential downside is how a deed in lieu affects your credit and lowers your credit score. Even though the debt will be forgiven, the deed in lieu itself will still show up on your credit report and will stay there for four years. However, it can be better to offer this to your lender as a way to eliminate your debt or reduce it. A foreclosure will affect your credit score much more, will appear on credit reports, and stay there for seven years.
Another thing to be wary of is that in some cases, the lender may demand you to pay some of the debt before signing the document. However, you may not be eligible for a foreclosure deed if you have more than one mortgage on your property. Even if you are eligible, your lender may decline it.
Before deciding if this is the right option for you, try talking to an attorney or financial advisor who is experienced in this matter. They can help you understand all of your available options and what might be best for you.
When you deed your property to the lender, you’re giving up all ownership rights to the home. The home then becomes the property of the lender through a process called “deed-in-lieu of foreclosure.” While we cannot tell you what to do if it ever comes to you being unable to meet your monthly installments, we gave you a good guide through this process and explained why it can be a tempting offer.
This is a great option if you are facing foreclosure and can’t sell your home, or just don’t have any other way to get rid of debts. Keep in mind that the final decision in this deed is made by the lenders and they can easily decline the offer you give them so be open to talking.