Deed in Lieu of Foreclosure – a Way Out of Foreclosure

“Can’t we negotiate? There must be a way to work this out so we can stay in our home!” This is one of the most common questions homeowners facing foreclosure ask themselves. We will give you some answers in this article.

Some Options are Better Than Others

Some — like going through the entire foreclosure process —will leave a black mark on your credit report for probably 10 years. Others — like simply walking away from the property — aren’t necessarily wise ways of dealing with the situation either.

Sometimes you’re out of options. Short of filing for bankruptcy (which only delays the inevitable, and does not STOP foreclosure in its tracks), sometimes your lender just isn’t willing to negotiate a loan workout or accept a short sale (agreeing to take less money on the sale of your property than the balance due on their underlying mortgage).

Then again, the lender MIGHT be willing to accept a deed-in-lieu of foreclosure. Depending on how severe your financial hardship is, and other factors, the deed-in-lieu would allow you to sign over legal ownership to your home for the lender’s agreement not to foreclose.

You are in effect giving up all claims and rights to the property in exchange for the ability to walk away from it without having to make another mortgage payment — and, possibly, without a mark on your credit report.

At the very most, maybe a light gray mark instead of a black mark, if any mark at all depending on whether the lender reports your mortgage as paid in full or not. Plus, once agreeing to the deed-in-lieu, the lender will likely have to waive its rights to any deficiency judgment, which saves you from having to pay off any deficiency amount awarded the lender by a court of law.

However, should you find yourself in this situation where there may be a deficiency judgment involved, the best thing to do is to consult with a real estate attorney about possible options. You should contact a real estate attorney anyway if you are considering a deed-in-lieu because it involves you giving up some legal rights.

For further details about a deed-in-lieu, the U.S. Department of Housing and Urban Development (HUD) has both a detailed fact sheet about the deed-in-lieu option and frequently asked questions about disposing of a property this way.

Bottom Line About Deed in Lieu

A deed-in-lieu is a potential way out of foreclosure for distressed homeowners who are hard pressed to find their way back to financial solvency. It may not always be the best way, but it can be much better than going all the way through the foreclosure process or filing for bankruptcy.

Step-by-Step Guide to Negotiating with Lenders

If you choose to go down the route of negotiate with the lender, rather than start starting the foreclosure process, one way to begin – if you’re facing foreclosure – is negotiating with your lender. Here we have written a more in-depth guide to stopping foreclosure.

Here are some quick tips on how to start the conversation and explore possible solutions:

1. Assessment of financial situation: Before reaching out, thoroughly assess your financial status. Gather all relevant financial documents such as your recent pay stubs, tax returns, and a detailed list of monthly expenses. This will prepare you to clearly present your situation during negotiations.
2. Contact your lender: Reach out to your mortgage servicer’s loss mitigation department. It’s best to do this as soon as you realize you might miss a mortgage payment. Explain your financial difficulties and ask about available hardship programs.
3. Explore alternatives: Inquire about loan modification options that can lower your monthly payments, such as extending the term of your mortgage or reducing the interest rate. Discuss the possibility of a short sale or a deed-in-lieu of foreclosure if keeping your home is not feasible.
4. Formal proposal: Submit a formal request including your financial assessment and the preferred alternative. Include a hardship letter explaining why you’re unable to meet your current mortgage obligations.
5. Follow-up: Stay in contact with your lender after submitting your proposal. Regular follow-ups can keep your case actively considered and might expedite the decision-making process.

Remember, clear communication and early intervention are key to finding a viable solution with your lender.