If you are having trouble making your monthly mortgage payments, there are options available to you that may benefit you financially, and in many cases, leave you in a good spot to purchase a home in the future.
Most of these options are familiar to homeowners: refinancing, loan modification, or selling/renting your home. However, an option that many may not be aware of is a deed in lieu of foreclosure.
In this article we discuss the basics of a deed in lieu of foreclosure, and compare it to a similar option, short sale. We also discuss some of the advantages of a deed in lieu of foreclosure, as well as a few of the drawbacks.
No matter which option you choose, if you are having trouble making your mortgage payments and are facing the possibility of foreclosure, it is in your best interest to speak with a foreclosure defense attorney to help evaluate your possibilities.
Overview of a Deed in Lieu of Forclosure
At its most basic level, a deed in lieu of foreclosure is when a homeowner gives the deed to their property back to their mortgage lender in exchange for being relieved of their mortgage debt.
The lender then takes title to the property, and acceptance of the deed may terminate the liability of the homeowner and anyone else that is liable for the mortgage debt.
Many borrowers and homeowners often confuse a deed in lieu of foreclosure with a short sale. A short sale occurs when the homeowner sells their home to a third party for less than the total debt remaining on the mortgage loan.
The bank then agrees to accept the proceeds from the sale in exchange for releasing the lien on the property. Although similar, a deed in lieu of foreclosure can be a simpler process.
As opposed to going through the selling process involved with a short sale, a deed in lieu of foreclosure allows homeowners to simply hand over the deed in exchange for a release of liability.
Advantages of a Deed in Lieu of Forclosure
A deed in lieu of foreclosure can be beneficial to both the lender and the borrower. As noted above, this process allows the homeowner to avoid the long and strenuous process of selling the home.
Additionally, it allows both parties to evade even longer and costly foreclosure proceedings.
There are also public advantages to the homeowner. Since both the lender and the borrower reach a mutual agreement through this process, including specific terms as to when and how the homeowner will vacate the property, the possibility of having officials show up with eviction notices, or public sales advertisements being published in newspapers (as is the case with foreclosure) is evaded.
Occasionally, the parties can reach an agreement that allows the homeowner to lease the property back from the lender for a certain period of time.
Because the lender saves money by avoiding the expenses normally incurred through the foreclosure process, they may be willing to work more with the homeowner to reach settlement terms that are favorable to those that wish to retain their living conditions.
Advantages of a Deed in Lieu of Forclosure
A deed in lieu of foreclosure can be beneficial to both the lender and the borrower. As noted above, this process allows the homeowner to avoid the long and strenuous process of selling the home.
Additionally, it allows both parties to evade even longer and costly foreclosure proceedings.
There are also public advantages to the homeowner. Since both the lender and the borrower reach a mutual agreement through this process, including specific terms as to when and how the homeowner will vacate the property, the possibility of having officials show up with eviction notices, or public sales advertisements being published in newspapers (as is the case with foreclosure) is evaded.
Occasionally, the parties can reach an agreement that allows the homeowner to lease the property back from the lender for a certain period of time.
Because the lender saves money by avoiding the expenses normally incurred through the foreclosure process, they may be willing to work more with the homeowner to reach settlement terms that are favorable to those that wish to retain their living conditions.
Drawbacks to a Deed in Lieu of Foreclosure
Although the lender and the borrower may reach favorable settlement terms in the process, this isn’t always the case. Many problems arise in the settlement process when there are subordinate liens or judgements against the property.
In this situation, the lender would have to go through the foreclosure process in order to obtain a clear title. If there are liens or judgements against the house, the lender may either choose not to agree to a deed in lieu of foreclosure, or add additional terms to the agreement which are in the best interest of the homeowner.
Another major drawback to a deed in lieu of foreclosure is that the homeowner needs to do the majority of the work. When a homeowner applies for a deed in lieu of foreclosure from their lender (or servicer), they need to submit all the paperwork required by the lender, negotiate all the terms and verify that the final agreement waives any deficiency liability.
Deficiency liability is the difference between what the homeowner owed the lender and the value of the property when it was given back to the bank.
In contrast, when a homeowner works on a short sale, their Realtor negotiates the general terms with the Buyer and many times their attorney works on negotiating with the lender or lenders to get all of the liens released and deficiency liability waived in writing.
Many Realtors and Attorneys will take all (or part) of the payment for their services out of the proceeds of the sale.
If you want to hire an attorney to negotiate your deed in lieu of foreclosure, there is no closing or proceeds to help pay them so you will usually need to pay for their services out of your pocket.
Due to this cost, may homeowners that pursue a deed in lieu of foreclosure negotiate with their lender themselves and just hire an attorney to review the final paperwork before they sign it.
From the homeowner’s perspective, the primary disadvantage though this process of the loss of the property, loss of income from the property, and the investment in the property. In addition to losing the money invested in the home, there are also tax consequences that homeowners should be aware of.
Generally, a conveyance of property is taxable by the federal government. If the lender forgives some or all of the deficiency and issues an IRS Form 1099-C, borrowers may have to include the forgiven debt as taxable income.
This is why it is always important to get income tax advice before you pursue a deed in lieu of foreclosure or a short sale.
A deed in lieu of foreclosure can be a beneficial option for some homeowners. When facing foreclosure, it is important to understand all of your options and make sure that you are investing your precious time and energy in the right direction.
A good way to do this is to consult with a foreclosure defense attorney or a real estate attorney familiar with all of your options to help you come up with a success plan to navigate the stressful foreclosure process.
Facing Foreclosure? Contact Adam Diamond Law
The legal team at Adam Diamond Law presents persuasive legal arguments based on the latest statutes and up-to-date case law designed to defend you in foreclosure and keep you in your home. Get in touch today to get started.
DISCLAIMER: This article and any information contained herein is solely for informational purposes and is only applicable in the state of Illinois. While it is important that you educate yourself, nothing herein should be construed as legal advice or create an attorney-client relationship. For specific questions, I always urge you to contact a local attorney for advice pertaining to your specific legal needs.
