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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, along with short sales, loan adjustments, payment strategies, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner voluntarily moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

For the most part, finishing a deed in lieu will launch the borrower from all commitments and liability under the mortgage contract and promissory note.

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 first step in getting a deed in lieu is for the borrower to request a loss mitigation package from the loan servicer (the business that manages the loan account). The application will need to be completed and submitted along with documents about the customer's earnings and expenses consisting of:

- proof of income (normally 2 recent pay stubs or, if the borrower is self-employed, an earnings and loss declaration).

• recent tax returns.
• a monetary statement, detailing month-to-month earnings and costs.
• bank statements (generally 2 current statements for all accounts), and.
• a challenge letter or difficulty affidavit.
  
  What Is a Challenge?
  
  A "difficulty" is a circumstance that is beyond the borrower's control that results in the debtor no longer being able to manage to make mortgage payments. Hardships that receive loss mitigation consideration consist of, for example, task loss, lowered income, death of a partner, health problem, medical expenses, divorce, rate of interest reset, and a natural disaster.
  
  Sometimes, the bank will require the borrower to attempt to sell the home for its reasonable market price before it will consider accepting a deed in lieu. Once the listing period ends, presuming the residential or commercial property hasn't offered, the servicer will order a title search.
  
  The bank will generally just accept a deed in lieu of foreclosure on a very first mortgage, implying there must be no extra liens-like 2nd mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this general rule is if the exact same bank holds both the first and the second mortgage on the home. Alternatively, a borrower can pick to settle 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 schedule a brokers price viewpoint (BPO) to figure out the value of the residential or commercial property.
  
  To finish the deed in lieu, the customer will be required to sign a grant deed in lieu of foreclosure, which is the file that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the arrangement in between the bank and the customer and will include a provision that the customer acted freely and voluntarily, not under browbeating or pressure. This file might also consist of provisions addressing whether the deal remains in full satisfaction of the debt or whether the bank can look for 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 the majority of deeds in lieu, the bank can't get a deficiency judgment for the difference in between the home's fair market worth and the financial obligation.
  
  But if the bank desires to protect its right to look for a shortage judgment, most jurisdictions permit the bank to do so by plainly mentioning in the deal documents that a balance remains after the deed in lieu. The bank usually requires to define the amount of the shortage and include this quantity in the deed in lieu files or in a separate arrangement.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also often depends upon state law. Washington, for instance, has at least one case that specifies a loan holder may not acquire a shortage judgment after a deed in lieu, even if the consideration is less than a full discharge of the debt. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was effectively a nonjudicial foreclosure, the debtor 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 eligible for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is qualified for a deed in lieu has 3 alternatives after completing the transaction:
  
  - moving out of the home instantly.
• entering into a three-month shift lease with no rent payment required, or.
• participating in a twelve-month lease and paying rent at market rate.
  
  To find out more on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be qualified for an unique deed in lieu program, which may include relocation support.
  
  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 filing a different lawsuit. In other states, state law avoids a bank from getting a shortage 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 occur rather than doing a deed in lieu of foreclosure that leaves you accountable for a deficiency.
  
  Generally, it may not deserve doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or minimize the shortage, you get some cash as part of the deal, or you receive additional time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For particular recommendations about what to do in your specific situation, speak to a local foreclosure legal representative.
  
  Also, you must consider for how long it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will purchase loans made 2 years after a deed in lieu if there are extenuating situations, like divorce, medical costs, or a job layoff that caused you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting duration for a Fannie Mae loan is seven years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, short sales, and deeds in lieu the very same, typically making it's mortgage insurance offered after 3 years.
  
  When to Seek Counsel
  
  If you require help understanding the deed in lieu process or interpreting the files you'll be needed to sign, you should think about talking to a certified attorney. A lawyer can also assist you work out a release of your individual liability or a minimized deficiency if required.