A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, together with short sales, loan modifications, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the homeowner 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.

In many cases, completing a deed in lieu will launch the debtor from all commitments and liability under the mortgage contract and promissory note.

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 very first step in acquiring a deed in lieu is for the customer to request a loss mitigation plan from the loan servicer (the business that manages the loan account). The application will require to be completed and sent in addition to documents about the borrower's income and costs including:

- evidence of earnings (normally 2 current pay stubs or, if the customer is self-employed, an earnings and loss statement).

• current tax returns.
• a monetary statement, detailing monthly income and costs.
• bank statements (typically two recent declarations for all accounts), and.
• a challenge letter or challenge affidavit.
  
  What Is a Challenge?
  
  A "challenge" is a scenario that is beyond the debtor's control that results in the debtor no longer being able to manage to make mortgage payments. Hardships that receive loss mitigation consideration include, for instance, task loss, decreased income, death of a spouse, illness, medical costs, divorce, rates of interest reset, and a natural catastrophe.
  
  Sometimes, the bank will need the debtor to try to sell the home for its reasonable market price before it will consider accepting a deed in lieu. Once the listing duration ends, presuming the residential or commercial property hasn't sold, the servicer will buy a title search.
  
  The bank will generally only accept a deed in lieu of foreclosure on a very first mortgage, suggesting there must be no extra liens-like second mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic rule is if the very same bank holds both the first and the 2nd mortgage on the home. Alternatively, a borrower can pick to pay off any additional liens, such as a tax lien or judgment, to assist in the deed in lieu transaction. If and when the title is clear, then the servicer will arrange for a brokers cost opinion (BPO) to identify the reasonable market value of the residential or commercial property.
  
  To complete the deed in lieu, the debtor 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 contract between the bank and the borrower and will consist of an arrangement that the borrower acted freely and voluntarily, not under browbeating or duress. This file might also consist of arrangements dealing with whether the transaction is in full complete satisfaction of the financial obligation or whether the bank deserves to seek a deficiency judgment.
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  Deficiency Judgments Following a Deed in Lieu of Foreclosure
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  A deed in lieu is typically structured so that the transaction pleases the mortgage debt. So, with many deeds in lieu, the bank can't get a shortage judgment for the distinction between the home's fair market value and the financial obligation.
  
  But if the bank desires to maintain its right to look for a deficiency judgment, the majority of jurisdictions permit the bank to do so by clearly specifying in the deal documents that a balance remains after the deed in lieu. The bank typically requires to define the amount of the shortage and include this quantity in the deed in lieu documents or in a separate contract.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu likewise often depends on state law. Washington, for example, has at least one case that specifies a loan holder might not obtain a shortage judgment after a deed in lieu, even if the factor to consider 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 since the deed in lieu was effectively a nonjudicial foreclosure, the borrower was entitled to protection under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is qualified for a deed in lieu has three alternatives after completing the deal:
  
  - moving out of the home right away.
• getting in into a lease without any rent payment required, or.
• participating in a twelve-month lease and paying rent at market rate.
  
  For additional information on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be eligible for a special deed in lieu program, which may consist of relocation assistance.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a deficiency judgment versus a house owner as part of a foreclosure or after that by filing a separate claim. In other states, state law prevents a bank from getting a shortage 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 happen rather than doing a deed in lieu of foreclosure that leaves you liable for a deficiency.
  
  Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to agree to forgive or decrease the deficiency, you get some money as part of the transaction, or you get extra time to stay in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For particular recommendations about what to do in your particular scenario, talk with a regional foreclosure lawyer.
  
  Also, you need to think about for how long it will require to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will purchase loans made 2 years after a deed in lieu if there are extenuating situations, like divorce, medical costs, or a task layoff that triggered you economic trouble, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting period for a Fannie Mae loan is 7 years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, short sales, and deeds in lieu the exact same, normally making it's mortgage insurance available after 3 years.
  
  When to Seek Counsel
  
  If you need aid understanding the deed in lieu process or translating the documents you'll be required to sign, you ought to consider seeking advice from a qualified attorney. An attorney can also help you work out a release of your personal liability or a decreased shortage if essential.