Buying a home is a major responsibility. If you are unable to continue paying the mortgage on your house, what happens next? You’ve heard of foreclosure and know it can get rather nasty. But did you realize there’s another option called a deed in lieu of foreclosure?
This option may be a bit less stressful than foreclosure, has less of a negative impact on a credit report, and may be faster to complete.
What Is a Deed in Lieu of Foreclosure?
Where a foreclosure may involve the court and a lengthy process, the alternative, deed in lieu of foreclosure, is fairly simple.
If your lender agrees, you simply hand over the deed and the lender releases the lien on the property. You may be released from any balance you owed on the mortgage (there may be exceptions if you owe more than the home is worth).
And while a deed in lieu will appear on your credit report, it doesn’t have as severe an impact as a foreclosure.
The lender might even offer you financial assistance to spruce up the home to make it more sellable.
Recommended: Tips On Buying a Foreclosed Home
Working With the Lender
Your lender may only consider a deed in lieu of foreclosure in certain situations.
The lender might require that you first put your home on the market as a short sale or explore a loan modification.
If you’re completely unable to pay, start by contacting your lender and asking if a deed in lieu of foreclosure is an option. If it is, you’ll be given an application and asked for documents proving your inability to pay the mortgage. The documents will show your income and expenses, as well as bank account balances.
This process can take 30 days or more.
If your application is approved, you may want a real estate lawyer to review it to help you understand whether you are fully released from the financial obligations tied to the mortgage. For example, if the lender sells the home for less than the remaining mortgage balance, are you responsible for that deficiency?
Once you are comfortable with the title-transferring agreement, you and the lender will sign it, and it will be notarized and recorded in public records.
At this point, you will be notified how long you have to leave the home.
When to Consider a Deed in Lieu
One instance when a deed in lieu may be a good idea is if you owe more on your home than it is worth, as long as the agreement stipulates that you won’t owe the difference between the value of the home and what you owe.
If you are unable to continue paying your mortgage, realize that a foreclosure will leave a nasty mark on your credit report for seven years and make it difficult or impossible for you to take out another mortgage for years.
A deed in lieu will appear on your credit report, but it may not have the same lasting effect. Your credit score will drop, but long term, it may not affect your ability to take out a loan.
Benefits of a Deed in Lieu
There are advantages for both the borrower and the lender when it comes to a deed in lieu. For both, the big benefit is not having to go through the long and expensive process of foreclosure.
Because a deed in lieu is an agreement between you and the lender and not an order from a court, you may have a little more flexibility in terms of when you vacate the property.
With foreclosure, you are sometimes forced to vacate within days by local law enforcement. With a deed in lieu, you may even be able to work out an arrangement where you rent the property back for a period. The lender gets a little rent money and you have more time to figure out your next move.
This option is more private than a foreclosure, if you’re worried what the neighbors think.
The benefits from the lender’s perspective include avoiding litigation and court time.
Drawbacks of a Deed in Lieu
There’s no getting out of a deed in lieu completely unscathed. It will appear on your credit report, even if it’s not as damaging as a foreclosure.
It may still be difficult to get another mortgage in subsequent years.
If you owe more than your home is worth, you may still be on the hook for the difference between the appraised property value and what you owe.
You may be denied a deed in lieu if there are other liens or tax judgments on the property, or if the home is in bad condition and requires maintenance to sell.
Recommended: Home Affordability Calculator
Being Smart About Your Mortgage
The best thing to do, if at all possible, is to avoid getting into a situation where you can’t afford to pay your mortgage. If you’re having short-term financial issues, talk to your lender immediately to see if there is the possibility of delaying a few months’ payment or setting up a loan modification.
The lender wants to help you; it’s easier to work out an agreement now than several months down the road, when you haven’t paid your mortgage at all and are facing foreclosure.
If you do end up in a situation where you are unable to continue paying your mortgage and you aren’t offered options, consider a deed in lieu of foreclosure as a faster and easier solution than a foreclosure.
If you’re just starting to consider buying a home, calculate how much in mortgage payments you can afford each month. Don’t forget to calculate insurance and interest as well.
It’s also best for any buyer to understand mortgage basics.
Recommended: Mortgage Calculator
If you can’t get a short sale or loan modification approved, a deed in lieu of foreclosure may be the best option. Rather than go through the foreclosure process, a deed in lieu allows a borrower to sign a property over to the lender.
Credit will take a significant hit, though not as bad as with a foreclosure.
If you’re looking for a mortgage, an investment property loan, or a cash-out refi, SoFi offers a range of options, with a mortgage loan officer guiding you every step of the way.
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