What is a Deed In Lieu of Foreclosure?

29 Mar

What is a Deed in Lieu of Foreclosure –

A “Deed in Lieu of Foreclosure” is just another foreclosure alternative.  It is when a borrower is in foreclosure and

Bankers always win

Bankers always win...

decides to sign over the grant deed to the lender in exchange for cancelling the loan and halting foreclosure proceedings if they have been initiated.  While a Deed in Lieu of Foreclosure will generally look better on a credit report there are a few issues with them:

Issues with a Deed in Lieu of Foreclosure –

Lenders will not always agree to Deed in Lieu of Foreclosure, they do not want to own real estate, they want cash.  Another issue can be if there are any other liens on the property;  If a lender agrees to a Deed in Lieu of Foreclosure they will have to take care of any liens before they will be able to resell the property, and since a foreclosure typically wipes out most junior liens this can be an attractive route for them.    So why would a lender agree to Deed in Lieu of Foreclosure?  Foreclosure are expensive and usually the value of a property is substantially less at a foreclosure auction versus a more typical real estate transaction.

Another issue with getting lenders to accept a Deed in Lieu of Foreclosure is they they can sometimes require a borrower to attempt to sell the property before agreeing to allow the borrower to simply hand over title to the property and be done with it.

Waiving of Deficiencies  with a Deed in Lieu of Foreclosure –

Once the lender has come to the point of agreeing to a Deed in Lieu of Foreclosure it is very important to make sure that any proposed settlement agreement includes language agreeing to waive the deficiency balance on the loan.  Sometimes these settlement proposal can be very dense and filled with legalese so if it is not crystal clear that the lender agrees to waive any deficiency balance I would take it to a lawyer who can advise you on the matter.

Tax Liabilities with a Deed in Lieu of Foreclosure –

As with a short sale there can be tax consequences.  You may be liable to pay taxes on the amount of debt forgiven by the lender.  However, under the Mortgage Debt Relief Act of 2007 (expires at the end of 2012) you should not have any tax liabilities if this is a primary residence and/or the loan(s) is the one you used to purchase the property.  A similiar law exists in covering taxes in the state of California.  It is always good to verify any tax questions with a qualified professional.

Conclusions –

When does it make sense to attempt a Deed in Lieu of Foreclosure?

If you have exhausted other foreclosure alternatives like loan modifications or short sale then it can be an end to the headache, however it makes little sense to attempt to have your lender agree to a Deed in Lieu of Foreclosure before at least attempting a short sale in an effort to be rid of the property.  A short sale looks better on your credit report, you can make sure your lender agrees to waive any deficiencies, if you have more than one loan those loans can be negotiated on a short sale and your tax liabilities will generally be the same.  Some worry that a short sale will cost money, but it doesn’t, please read How Much Will a Short Sale Cost Me?

For an in depth review of what option to avoid foreclosure would be the best option for you please call me directly 916.585.3636.

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