Despite the fact that the prevalence of foreclosures has decreased since the housing crash a decade ago, it still happens quite often. In fact, almost 1 million U.S. homes were in the middle of foreclosure proceedings last year.
Foreclosures not only wreak havoc on your financial health and your credit rating, they can also be emotionally devastating. Being forced out of your home is a nightmare that no homeowner wants to go through, but if you default on your mortgage, you risk going down that ugly path.
Fortunately, there are ways to curb foreclosure proceedings if you find yourself in default of your mortgage, and one alternative is to work out what’s known as a ‘deed in lieu of foreclosure’.
What is a Deed in Lieu of Foreclosure?
Basically, a deed in lieu of foreclosure is a specific type of arrangement whereby you voluntarily give up the deed to the house to the bank in an attempt to avoid the full foreclosure process. Foreclosure is a long, drawn out, exhausting process that is not just an unpleasant experience for you, but for the lender as well.
Like foreclosure, you will still have to vacate the home with a deed in lieu, but you’ll be able to avoid involving the courts as would be the case with a formal foreclosure. But once all of your interest in the property has been handed over to your lender, your defaulted mortgage will be considered completely satisfied.
The actual nitty-gritty details of a deed in lieu of foreclosure will vary depending on the bank, but the process typically starts off with a few missed mortgage payments. The bank will then notify the borrower of the defaults, and if both the lender and homeowner agree, a deed in lieu of foreclosure process can start. At that point, you’ll be asked to move out of the home and submit the deed to the bank who will then be considered the owner of the property.
After the deed in lieu documents are signed by the homeowner, the process is complete.
Are You Eligible For a Deed in Lieu of Foreclosure?
Before you set your sights on this alternative to foreclosure, you will have to see if your lender agrees to this process and if you are even eligible for it.
For instance, if your bank thinks that they will be able to recoup more of their money by going the foreclosure route, you might be turned down for a deed in lieu. You might also be rejected if there are any subsequent liens filed against the home. In this case, these liens will become the lender’s responsibility if they’re not released before a deed in lieu of foreclosure is agreed upon.
A property with more than one loan against it may also not be eligible for a deed in lieu of foreclosure. The lenders holding the second (or third, etc) mortgage will probably not agree to a deed in lieu of foreclosure because it will be extremely difficult for them to get their money back by taking this route. Once the home has been sold, the odds of there being any funds left from the proceeds of the sale to pay off all other lenders are quite low.
Why is a Deed in Lieu of Foreclosure the Better Alternative to Foreclosure?
It might be tough to even imagine there being any pros to a situation whereby you’re being kicked out of your home. But a deed in lieu of foreclosure can come with certain benefits over enduring a full foreclosure.
If you’ve been given the green light to go ahead with a deed in lieu of foreclosure, you may be able to get away with not having to repay your lender back any money if there is a discrepancy between what the lender is able to sell the home for and what you still owe on the mortgage. In the case of a foreclosure, lenders often take the defaulted borrower to court in an effort to get back this difference. With a deed in lieu, you’re more likely to be forgiven for this deficiency.
A deed in lieu of foreclosure is also a much faster and less invasive procedure compared to the alternative. Once you leave the home and it’s sold by the lender, the mortgage is cleared and the process is typically over. This can be done and over with in a matter of a couple of weeks compared to a foreclosure process which can take months and even a year or more to complete.
While your credit score will take a hard a hit with a deed in lieu just like it would with a full foreclosure, you will probably have an easier time getting approved for another mortgage or other type of loan in a shorter amount of time, usually within two or three years compared to at least seven with a formal foreclosure.
The Bottom Line
Defaulting on your mortgage likely result in heavy consequences, including being forced out of your home after foreclosure proceedings have begun. But you can effectively stop this process from starting by immediately contacting your lender after your first missed mortgage payment. It’s possible that your lender may be willing to work something out with you if you show that you are eager to settle the matter.
If you and your lender are unable to come up with a resolution, contact a credit counselor who may be able to offer you some counseling and introduce some workable debt management strategies that might make it possible for you to make additional money available to make your mortgage payments before going into default.
If foreclosure is imminent, a deed in lieu of foreclosure may be your last resort in order to avoid the nasty and lengthy process that inevitably follows. While you will still wind up losing your home, the end result is slightly better for your financial health ove