A deed-in-lieu of a foreclosure is a solution for homeowners who can no longer afford their mortgage, but don’t want the black mark of a foreclosure on their credit report. Essentially, the homeowner offers to give the deed to the property back to the lender in exchange for being let off the hook for the loan.
It is a step taken when forbearance, repayment plans and/or loan modification is denied by the lender, or they are not favorable options.
Homeowners sometimes choose a short sale to alleviate the burden of the mortgage. In doing so, they make an agreement with the lender to sell the house for less than it’s worth in exchange for the debt being wiped away. This step is usually required before deed-in-lieu is offered by the bank.
For deed-in-lieu to be completed, the homeowner must complete a loss mitigation package from the bank. This includes information regarding your monthly income, tax returns, bank statements and a hardship letter, explaining why you can’t afford the mortgage anymore.
Once the package is approved, the deed will be transferred to the lender. You will also sign an estoppel affidavit, which states that you are acting on your own accord, as well as details of the transaction.
The optimal outcome is that the transaction will cover the debt in full. However, the lender may have the option to seek a deficiency judgment, which will be stated in the affidavit. This simply means the lender can seek further action to get compensation for the full value of the mortgage.
In some cases, foreclosure is inevitable. However, the best way to avoid this scenario is to work with an experienced real estate agent to ensure you get a house that you can afford, both now and in the future.