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1 Steps to Completing a Deed in Lieu Of Foreclosure

A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, in addition to brief sales, loan modifications, repayment plans, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner willingly 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.

For the most part, a deed in lieu will launch the customer from all commitments and liability under the mortgage agreement and promissory note.
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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 obtaining a deed in lieu is for the borrower to request a loss mitigation package from the loan servicer (the business that handles the loan account). The application will need to be submitted and sent along with documents about the debtor's income and expenditures consisting of:

- proof of income (typically two current pay stubs or, if the debtor is self-employed, an earnings and loss declaration).

recent income tax return.
a financial statement, detailing monthly earnings and costs.
bank statements (typically two current statements for all accounts), and.
a hardship letter or difficulty affidavit.

What Is a Hardship?

A "difficulty" is a circumstance that is beyond the borrower's control that leads to the customer no longer having the ability to pay for to make mortgage payments. Hardships that get approved for loss mitigation factor to consider consist of, for instance, task loss, reduced income, death of a partner, illness, medical costs, divorce, rate of interest reset, and a natural disaster.

Sometimes, the bank will need the debtor to attempt to sell the home for its reasonable market price before it will think about accepting a deed in lieu. Once the listing period expires, assuming the residential or commercial property hasn't sold, the servicer will order a title search.

The bank will usually just accept a deed in lieu of foreclosure on a first mortgage, meaning there should be no additional liens-like 2nd mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this general guideline is if the very same bank holds both the very first and the second mortgage on the home. Alternatively, a debtor can select to pay off any extra liens, such as a tax lien or judgment, to facilitate the deed in lieu transaction. If and when the title is clear, then the servicer will organize for a brokers price opinion (BPO) to determine the fair market price of the residential or commercial property.

To complete the deed in lieu, the customer will be required to sign a grant deed in lieu of foreclosure, which is the file 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 include an arrangement that the customer acted freely and voluntarily, not under browbeating or duress. This file may also consist of arrangements dealing with whether the deal remains in complete complete satisfaction 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 typically structured so that the transaction satisfies the mortgage financial obligation. So, with most deeds in lieu, the bank can't get a shortage judgment for the distinction in between the home's fair market worth and the debt.

But if the bank wants to maintain its right to look for a shortage judgment, most jurisdictions allow the bank to do so by plainly mentioning in the transaction documents that a balance stays after the deed in lieu. The bank generally requires to define the quantity of the deficiency and include this amount in the deed in lieu documents or in a different agreement.

Whether the bank can pursue a deficiency judgment following a deed in lieu likewise in some cases depends on state law. Washington, for example, has at least one case that states a loan holder might not acquire a deficiency judgment after a deed in lieu, even if the consideration 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 since the deed in lieu was effectively a nonjudicial foreclosure, the borrower was entitled to defense under Washington's anti-deficiency laws.

Mortgage Release Program Under Fannie Mae

If Fannie Mae owns your mortgage loan, you may be qualified for its Mortgage Release (deed in lieu) program. Under this program, a customer who is eligible for a deed in lieu has three choices after finishing the transaction:

- moving out of the home immediately.
entering into a three-month shift lease with no rent payment needed, 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 eligible for an unique deed in lieu program, which may consist of relocation help.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a deficiency judgment against a property owner as part of a foreclosure or after that by submitting a different lawsuit. In other states, state law avoids a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a deficiency judgment versus you after a foreclosure, you may be much better off letting a foreclosure happen rather than doing a deed in lieu of foreclosure that leaves you liable for a deficiency.

Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or decrease the deficiency, you get some cash as part of the deal, or you get 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 suggestions about what to do in your specific scenario, talk with a regional foreclosure attorney.

Also, you should take into account how long it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will purchase loans made two years after a deed in lieu if there are extenuating circumstances, like divorce, medical bills, or a task layoff that caused you financial difficulty, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting duration for a Fannie Mae loan is 7 years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the very same, usually making it's mortgage insurance offered after three years.
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When to Seek Counsel

If you require aid comprehending the deed in lieu process or translating the documents you'll be needed to sign, you ought to think about talking to a certified lawyer. A lawyer can likewise help you work out a release of your personal liability or a decreased shortage if essential.