What Is a Deed In Lieu of Foreclosure?

A deed in lieu of foreclosure is an arrangement where a homeowner who cannot keep up with their mortgage payments voluntarily transfers their property to the lender. This process helps avoid the legal and financial burdens of a formal foreclosure.

In this agreement, the homeowner negotiates with the lender to turn over the house and vacate the property. In return, the lender closes out the mortgage loan, potentially offering benefits such as:

• Allowing the homeowner to stay in the house for a specified period to find alternative living arrangements.
• Providing a “cash-for-keys” stipend to assist with moving expenses.
• Releasing the homeowner from some or all responsibility for any mortgage deficiency.

Pros and Cons of Deed in Lieu of Foreclosure

Pros

• Lower legal costs and reduced publicity compared to foreclosure.
• Potential release from mortgage deficiency liability.
• Possible concessions such as temporary housing or financial assistance for moving.

Cons

• Lenders may refuse the request for various reasons.
• Potential tax implications on forgiven debt.
• Negative impact on credit, though less severe than foreclosure.

Does a Deed in Lieu of Foreclosure Hurt Your Credit?

Yes, a deed in lieu of foreclosure will negatively affect your credit, but it is less damaging than a full foreclosure. The mortgage will be listed as closed but not paid in full, which remains on your credit report for up to seven years and can lower your credit scores.

How to Request a Deed in Lieu of Foreclosure

If you are considering a deed in lieu of foreclosure, follow these steps:

1. Do your homework: Understand the implications and consult with a housing counselor or foreclosure attorney.
2. Request a loss mitigation packet: Obtain the necessary forms and financial document list from your lender.
3. Negotiate terms: Work with an expert to fill out forms and negotiate conditions.
4. Respond promptly: Provide additional documents and address any changes requested by the lender.
5. Stick to the plan: Follow all provisions carefully to avoid breaking the contract.

Alternative Ways to Avoid Foreclosure

Short Sale

A short sale involves selling the property for less than the mortgage balance with the lender’s permission. The lender accepts the sale proceeds and closes the mortgage, though the borrower may still owe the remaining balance.

Mortgage Modification

This option restructures the loan to make payments more affordable, often by extending the loan term, which increases the total interest paid over time.

Repayment Plan

If you can resume regular payments, a repayment plan allows you to make up missed payments through a lump sum or increased monthly payments.

Forbearance

Forbearance temporarily reduces or suspends mortgage payments for up to 12 months, typically for borrowers facing short-term financial hardship.

Chapter 13 Bankruptcy

This legal process sets up a repayment plan to address overwhelming debt, allowing you to catch up on mortgage payments while erasing other consumer debts. However, it severely impacts your credit.

The Bottom Line

While a deed in lieu of foreclosure can help you avoid the legal costs and extended process of foreclosure, it still has significant consequences for your credit and living situation. If you are facing foreclosure, consider all your options and seek professional advice.

For expert mortgage services and guidance, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your mortgage needs and find the best solutions for your situation.