A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, in addition to short sales, loan modifications, repayment strategies, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner voluntarily moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

In many cases, completing a deed in lieu will launch the customer 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 primary step in getting a deed in lieu is for the customer to request a loss mitigation bundle from the loan servicer (the business that manages the loan account). The application will require to be completed and submitted together with paperwork about the debtor's income and costs consisting of:

- proof of earnings (generally two recent pay stubs or, if the customer is self-employed, an and loss statement).

• current income tax return.
• a financial declaration, detailing regular monthly income and expenditures.
• bank declarations (typically two current statements for all accounts), and.
• a difficulty letter or difficulty affidavit.
  
  What Is a Challenge?
  
  A "difficulty" is a situation that is beyond the borrower's control that leads to the debtor no longer having the ability to manage to make mortgage payments. Hardships that get approved for loss mitigation factor to consider include, for example, job loss, minimized income, death of a partner, illness, medical expenses, divorce, rates of interest reset, and a natural disaster.
  
  Sometimes, the bank will require the customer to attempt to sell the home for its fair market value before it will think about accepting a deed in lieu. Once the listing duration expires, presuming the residential or commercial property hasn't sold, the servicer will order a title search.
  
  The bank will typically only accept a deed in lieu of foreclosure on a first mortgage, implying there should be no additional liens-like second mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the very same bank holds both the first and the 2nd mortgage on the home. Alternatively, a customer can choose to settle any extra 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 set up for a brokers cost opinion (BPO) to figure out the fair market price of the residential or commercial property.
  
  To finish the deed in lieu, the borrower will be needed to sign a grant deed in lieu of foreclosure, which is the document that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the agreement between the bank and the customer and will consist of a provision that the borrower acted freely and willingly, not under coercion or duress. This document may likewise include provisions addressing whether the transaction remains in complete complete satisfaction of the debt or whether the bank deserves to look for a shortage judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is often structured so that the deal satisfies the mortgage debt. So, with most deeds in lieu, the bank can't get a shortage judgment for the difference between the home's fair market worth and the financial obligation.
  
  But if the bank desires to protect its right to seek a shortage judgment, most jurisdictions allow the bank to do so by clearly mentioning in the transaction files that a balance remains after the deed in lieu. The bank typically needs to define the amount of the deficiency and include this amount in the deed in lieu files or in a different arrangement.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also often depends upon state law. Washington, for example, has at least one case that mentions a loan holder may not acquire 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 because 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 may be eligible for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is eligible for a deed in lieu has 3 options after finishing the deal:
  
  - vacating the home right away.
• getting in into a three-month shift lease with no rent payment required, or.
• entering into 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 might be eligible for a special deed in lieu program, which might consist of moving help.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a shortage judgment against a house owner as part of a foreclosure or after that by submitting a different claim. In other states, state law avoids 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 occur rather than doing a deed in lieu of foreclosure that leaves you responsible for a deficiency.
  
  Generally, it may not deserve doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or lower the deficiency, you get some cash as part of the transaction, or you get 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 recommendations about what to do in your specific situation, talk to a regional foreclosure lawyer.
  
  Also, you should take into account the length of time it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will buy loans made two years after a deed in lieu if there are extenuating situations, like divorce, medical bills, or a job layoff that triggered you financial difficulty, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, the waiting period for a Fannie Mae loan is 7 years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, brief sales, and deeds in lieu the exact same, typically making it's mortgage insurance coverage readily available after 3 years.
  
  When to Seek Counsel
  
  If you need help comprehending the deed in lieu procedure or analyzing the documents you'll be required to sign, you must consider speaking with a certified attorney. An attorney can also assist you negotiate a release of your personal liability or a minimized shortage if required.