As a Foreclosure Defense and Bankruptcy Attorney, I am frequently asked “what is a Deed in Lieu of Foreclosure or otherwise known as a Deed in Lieu?” A Deed in Lieu occurs when a homeowner signs a deed to his or her property conveying his or her interest in said property over to the lender who holds the security interest in the property.
When would a homeowner decide to sign a Deed in Lieu? Deed in Lieu is an option for homeowners where the loan or loans on the property are in default. When a homeowner completes a deed in lieu transaction, the homeowner has avoided a foreclosure public sale or auction, and has the ability to start rebuilding his or her credit sooner than if the property had gone through foreclosure. As an additional incentive to the homeowner, many lenders will offer relocation money often known as “cash for keys” which is meant to assist the homeowner with moving expenses.
Why would a lender agree to a Deed in Lieu on a property? The lender, among other things, saves the costs associated with account collection activity and/or foreclosure attorney fees and court costs.
Applying for a Deed in Lieu is a process much like any transaction associated with real property. There is an application and approval process consisting of eligibility requirements. These eligibility requirements are lender specific, but generally consist of the following requirements:
- The homeowner is experiencing financial hardship, such as reduced income, high medical expenses or a divorce.
- The homeowner is unable to afford the current monthly mortgage payment.
- The homeowner is unable to modify the current monthly mortgage payment in order to make it affordable.
- The homeowner has tried for at least 90-120 days to sell the property at fair market value with the help of a licensed real estate agent, but was unsuccessful.
Homeowner’s beware! Closing on a Deed in lieu transaction with your lender does not always mean that you would be walking away debt free.
Remember, a Deed in lieu is a way for a homeowner who is in default to avoid a foreclosure public sale. This does not always mean that you would walk away owing zero liability. Many times the lender requires a certain portion of the debt to be paid by the homeowner. This is calculated based upon the fair market value of the property versus the total amount owed to the lender. Additionally, there can be tax liabilities associated with this transaction as part of creditor canceled or forgiven debt.
As a homeowner contemplating a Deed in Lieu, it is important to fully understand the process as well as your rights under both state and federal laws. As it relates to this process, there are many factors to be considered and everyone’s circumstances are different. Therefore, before entering into this transaction with the lender, it is our advice that you sit down with a professional who can go over your options regarding this matter.
At Tudhope Law, we have attorneys who specialize in foreclosure defense, loan modifications, homeowner relocation transactions, bankruptcy, and other debt relief representation. An attorney would gladly sit down to consult with you FREE of charge. We will review all relevant paperwork, while also considering the details surrounding your current financial status, and at the same time addressing each of your individual specific goals and needs.