A deed-in-lieu also referred to as a deed-in-lieu of foreclosure, or foreclosure deed is a way of avoiding foreclosure on a house when the homeowner can’t make their mortgage payments. It is generally seen as a means of last resort when foreclosure would otherwise be unavoidable.
What is a Deed-In-Lieu, and How Does It Work?
A deed-in-lieu transfers the property title from the property owner to the lending bank or financial institution for that property. When you have a mortgage on a property, that property serves as collateral for the loan. When transferring the property title, the bank accepts the collateral on the property as payment, and the former property owner does not have to pay the rest of the loan back.
Unlike foreclosure, a deed-in-lieu is entered into voluntarily by both the bank and the property owner. While a deed-in-lieu will most likely work to the banks, favor rather than the property owners, it can still be less damaging to the property owner’s credit than a foreclosure would be.
Why Do Banks Offer the Deed-In-Lieu Option?
Some banks will offer a deed-in-lieu because it will result in less of a loss for them if the property owner cannot pay the mortgage. The deed-in-lieu process also tends to be faster than the foreclosure process and often does not require the legal litigation that foreclosures many times do.
Banks that offer a deed-in-lieu will typically have weighed out the risks before agreeing to it. If they feel a deed-in-lieu will work to their advantage, they will usually agree to it. Here are what banks will be looking at when considering a deed-in-lieu of foreclosure.
- The value of the property and if it’s worth more than the remaining mortgage balance
- Any liens on the property
- Possibility of a short sale
- State litigation requirements
- Foreclosure expenses they’ll have to pay
How Can a Property Owner Request a Deed-In-Lieu?
To request a deed-in-lieu, a property owner will need to submit an application to their lender as well as information about their financial situation. A property owner can request a deed-in-lieu even if the property is not yet officially in foreclosure. If there is a possibility for a short sale, the lender may require the property owner to list the property for sale and submit proof of the listing before considering offering a deed-in-lieu.
What Are Some Disadvantages of a Deed-In-Lieu?
While a deed-in-lieu is better than a foreclosure, it still has disadvantages. If you sign deed-in-lieu, it will stay with you for several years, and you will not be able to buy a new property until that time is up. It will also lower your credit score, making it difficult to get other types of loans as well.
You also should be aware that if the value of your property is a lot less than how much you owe, you may have to give your lender additional money to make up part of the difference.
What Are Some Advantages of a Deed-In-Lieu?
The most obvious advantage of a deed-in-lieu is that it will relieve the owner from paying the rest of the loan back. Although a deed-in-lieu will still result in having to leave the property, it can be a less stressful and less embarrassing process. A deed-in-lieu will have agreed upon terms as to when and how the property owners will leave. These terms assure that authorities won’t be knocking at the property owner’s door to evict them.
Both parties can benefit from not having to go through long foreclosure proceedings and avoiding additional legal expenses. When you sign a deed-in-lieu, it will negatively affect your credit, but it won’t have as substantial a negative impact as a foreclosure would.
Both a foreclosure and a deed-in-lieu will drop your FICO score 100 or more points. If you have signed a deed-in-lieu, you will probably be able to purchase a new property in two to four years, while a foreclosure will prevent you from buying a new property for at least four to seven years.
Who Else Should a Property Owner Speak to When Considering a Deed-In-Lieu?
When you are considering a deed-in-lieu, it’s a good idea to speak to both an accountant and a qualified legal adviser. A legal adviser can help to make a decision that is in the property owner’s best interest rather than the bank’s best interest. A legal adviser can help make sure that the former property owner is also not liable to repay other loans against the property after the deed passes back to the bank.
Speaking to an accountant may also be beneficial when considering a deed-in-lieu. An accountant can help a property owner determine what impact a deed-in-lieu can have on their taxes. They can also help the owner determine what the IRS can tax, and if tax relief options are available for you.