Deeds In Lieu Of Foreclosure

Over the past several months many of my friends have asked me what is a Deed in lieu of foreclosure, is it a way to prevent foreclosure, and what are the ramifications involved. First and foremost, let me emphasize one thing, and that is whenever you are seeking to put a stay to foreclosure through what ever means you may be thinking about, always consult an attorney. (Legal Advice should always be sought from legal counsel in the relevant jurisdiction)

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.

A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower ) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default (DEFAULT: When something you agree to is not done. An example is not making payment on a loan when due. Some loan agreements specify the entire amount is due if any covenants are in default.) and avoid foreclosure proceedings.

When it seems that the only possible alternative to save your home from foreclosure have been exhausted, you have tried to sell your home but the market has fallen whereby your home value is less or equal to your mortgage balance, and while all the talk about working things out with your lender when you´re in a financially distressed situation and afraid that you might lose your home to foreclosure, there is a time when the realization sets in that you just can´t get yourself out of debt, there are options, some are better than others.

Some of them are:

1. Going through the entire foreclosure process, which ultimately will leave a black mark on your credit report for about 10 years or so.

2. Simply walking away from the property, which isn´t necessarily a wise ways of dealing with you situation either.

3. 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).

4. 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, there may be a ding or two mark instead of a massive ding which could affect you for years to come, if any dings 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).

Typically your Mortgage Company will require that your home has been listed with a Real Estate Agent for at least 30 days and there are no other liens on the property for them to approve you. Some Companies may also require that the property be vacant, an interior appraisal of the property and a minimum of 60 days prior to a Foreclosure sale. Let us help you with filing the necessary paperwork and negotiating with your Mortgage Company

There are possible tax consequences you should be aware of with a deed in lieu of foreclosure which involve 2 types of taxes you may have to pay in which you may have to pay one of (check with your real estate attorney or tax advisor)

Deed tax: Since deed in lieu foreclosure involves transfer of property, the borrower needs to pay state deed tax upon conveyance of property to the lender. The deed tax is $1.65 for no consideration or when consideration is $500 or less.

The tax is calculated on the difference between the fair market value of your property and your mortgage balance plus liens removed from the property due to deed in lieu. It may vary from one county to another.

Income tax on canceled debt: As per Mortgage Debt Forgiveness Tax Relief Act (applicable till the end of 2009), one need not pay tax on canceled debt (unpaid loan balance which is forgiven by lender) resulting from deed in lieu of foreclosure. However, a borrower needs to satisfy certain conditions for mortgage tax relief.

In some states the process is a legal one which is begun in a court of law with the filing of a document called a Lis Pendens (LIS PENDENS: A recorded notice that tells the world that a lawsuit is in progress, the outcome of which could affect the title to a particular piece of land). This is known as "judicial" foreclosure.

In other states the process is begun "non-judicially" by the filing and recording of a Notice of Default with the county recorder's office by either the lender directly, or through a disinterested third party known as a "trustee."

The actual length of the foreclosure process varies from state to state depending again on the state's foreclosure statute. In some states it can take as little as three months, while in other states the entire process can drag out for as much as a year.

The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure (FORECLOSURE: Foreclosure is to deprive a mortgagor (borrower) of the right to redeem a property after defaulting on mortgage payments. It is a legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgages. Also known as a repossession of property). Another benefit to the borrower is that it hurts their credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, and additional advantages if the borrower subsequently files for bankruptcy.

In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration (CONSIDERATION: A bargained-for benefit or right. Consideration may be a promise to perform a certain act – for example, a promise to deliver goods, a promise not to do something, payment, or a promise to pay money, among other things. Whatever its particulars, consideration must be something of value to the people who are making the contract) that is at least equal to the fair market value (FAIR MARKET VALUE: Price that probably would be negotiated between a willing seller and willing buyer in a reasonable time. Usually arrived at by comparable sales in the area) of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair market value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender.

Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parol evidence rule (PAROL EVIDENCE RULE: When a written agreement is intended to be a complete and final document, then the terms of the agreement cannot be altered by evidence of oral (parol) agreements that purport to change, explain, or contradict the written agreement) and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.

Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.