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Steps to Completing a Deed in Lieu Of Foreclosure
Hermelinda Llanas edited this page 5 days ago
A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, in addition to brief sales, loan modifications, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the house owner voluntarily transfers title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank concurring not to pursue a foreclosure.
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In many cases, finishing a deed in lieu will release the debtor from all responsibilities and liability under the mortgage agreement and promissory note.
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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 obtaining a deed in lieu is for the customer to ask for a loss mitigation plan from the loan servicer (the business that handles the loan account). The application will require to be completed and submitted along with paperwork about the borrower's earnings and expenditures consisting of:
- proof of income (usually two current pay stubs or, if the borrower is self-employed, a profit and loss declaration).
- current tax returns.
- a monetary statement, detailing regular monthly earnings and expenses.
- bank declarations (normally two current statements for all accounts), and.
- a hardship letter or hardship affidavit.
What Is a Challenge?
A "hardship" is a situation that is beyond the customer's control that results in the customer no longer having the ability to manage to make mortgage payments. Hardships that certify for loss mitigation consideration consist of, for example, task loss, reduced earnings, death of a partner, health problem, medical expenditures, divorce, interest rate reset, and a natural catastrophe.
Sometimes, the bank will need the customer to try to sell the home for its fair market price before it will consider accepting a deed in lieu. Once the listing duration ends, presuming the residential or commercial property hasn't offered, the servicer will order a title search.
The bank will normally just accept a deed in lieu of foreclosure on a very first mortgage, implying there must be no additional liens-like 2nd mortgages, judgments from financial institutions, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the same bank holds both the very first and the second mortgage on the home. Alternatively, a debtor can choose to settle any additional liens, such as a tax lien or judgment, to help with the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers price opinion (BPO) to determine the fair market worth of the residential or commercial property.
To finish the deed in lieu, the customer will be needed 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 terms of the arrangement in between the bank and the customer and will consist of a provision that the debtor acted easily and willingly, not under coercion or pressure. This document might likewise of arrangements dealing with whether the deal is in complete fulfillment of the debt or whether the bank deserves to seek a deficiency judgment.
Deficiency Judgments Following a Deed in Lieu of Foreclosure
A deed in lieu is frequently structured so that the transaction satisfies the mortgage debt. So, with the majority of deeds in lieu, the bank can't get a shortage judgment for the difference between the home's reasonable market worth and the financial obligation.
But if the bank wishes to preserve its right to seek a deficiency judgment, many jurisdictions permit the bank to do so by clearly mentioning in the deal documents that a balance stays after the deed in lieu. The bank normally needs to specify the quantity of the shortage and include this amount in the deed in lieu documents or in a separate agreement.
Whether the bank can pursue a deficiency judgment following a deed in lieu likewise in some cases depends upon state law. Washington, for instance, has at least one case that states a loan holder may not acquire a deficiency judgment after a deed in lieu, even if the consideration is less than a full discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was successfully a nonjudicial foreclosure, the borrower was entitled to security under Washington's anti-deficiency laws.
Mortgage Release Program Under Fannie Mae
If Fannie Mae owns your mortgage loan, you may be qualified for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is qualified for a deed in lieu has 3 choices after finishing the deal:
- moving out of the home instantly. - participating in a three-month transition lease with no rent payment needed, or.
- entering into a twelve-month lease and paying rent at market rate.
For more details 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 assistance.
Should You Consider Letting the Foreclosure Happen?
In some states, a bank can get a deficiency judgment versus a property owner as part of a foreclosure or after that by submitting a different lawsuit. In other states, state law prevents a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a shortage judgment against you after a foreclosure, you may be better off letting a foreclosure take place instead of doing a deed in lieu of foreclosure that leaves you accountable for a shortage.
Generally, it may not be worth doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or reduce the shortage, you get some money 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 advice about what to do in your specific scenario, speak to a regional foreclosure lawyer.
Also, you should think about the length of time it will take 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 circumstances, like divorce, medical costs, or a task layoff that caused you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting duration for a Fannie Mae loan is seven years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the exact same, normally making it's mortgage insurance coverage available after three years.
When to Seek Counsel
If you need aid understanding the deed in lieu process or interpreting the documents you'll be needed to sign, you ought to think about seeking advice from a qualified lawyer. An attorney can also assist you negotiate a release of your individual liability or a decreased deficiency if needed.