A financial crisis can cause a lot of trouble for people be it due to job loss or from a divorce. But the threat of foreclosure is also faced by many homeowners with major money problems. But deed in lieu of foreclosure could be a possible solution.
Stripping away the legalese and talking about what the phrase explains is a situation where a homeowner to avoid foreclosure, hands over his property to the lender. This option if handled carefully can make a stressed homeowner get out of a burdensome situation and also avoid him from going into a big debt. But if the situation is mishandled with details being avoided, this can leave the homeowner no better off than being in debt or losing his property to foreclosure.
What is Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a legal document that transfers a property’s title from the homeowner to the lender or the bank that holds the mortgage to avoid foreclosure and become relieved from the mortgage debt. A deed in lieu of foreclosure is a possible option that a mortgagor or a homeowner can take to avoid foreclosure.
Homeowners with due mortgage payments and with money not enough to meet their financial obligation are not always capable of selling their homes to cover the remaining balance. A possible solution to this problem is to sign over the property to the lender only if the lender agrees to such an agreement. This can help Ohio homeowners who are willing to walk away from the property in order to avoid the consequences of a foreclosure. Lenders will usually accept a deed in lieu of foreclosure to save their expense on legal fees and try to bring closure to the problem as soon as they can rather than filing for foreclosure.
Some people have to face this decision when they are denied by the bank to give a loan modification or the bank rejects a short sale offer. This can prove to be a better option for homeowners than waiting for their property be foreclosed by the bank.
This step is drastic and is only taken as a last resort when the homeowner has exhausted all other means and has accepted the fact that he will lose his property if he doesn’t do so.
Deed in Lieu of Foreclosure Process
A deed in lieu works differently for everyone and its process somewhat depends on who the loan servicer is and who the lender is or the person who has invested in you. Initially, you’ll have to try to sell your property within 3 months at fair market value before the lender will agree to a deed in lieu. Also your title should be clear, that is, there should not be other liens on the property. You might have to give details of your finances and show that the property won’t sell for what it is owed.
As decided in the deal, the property owner usually consents to vacate the house, leaving it in good and clean condition, and signs over the ownership to the lender. Sometimes, the borrower has to submit an affidavit specifying that the process was at one’s discretion.
In some cases, the homeowner is allowed to rent the home by the lender even after turning over the deed. For instance, Fannie Mae, offers this option to the borrowers who have signed up for a Fannie Mae loan. Also in some instances, the withdrawing homeowner will get relocation money after the completion of a deed in lieu.
Generally, your mortgage lender has the right to get a deficiency judgement against you unless your deed in lieu of foreclosure agreement says otherwise. A deficiency judgment allows the lender to file lawsuits and he can take actions against you for your unpaid mortgage debt.
Cons of Deed in Lieu
Impact your credit negatively
Loss of the property and any income or investments associated with it.
The homeowner will not be in control of the sale of their home, and how much the mortgage company retrieves once sold.
Deed in Lieu vs Short Sale
A deed in lieu of foreclosure is different from a short sale because it transfers the property to the lender instead of selling it to a new buyer. A short sale is also a negotiated preparation between a defaulting homeowner and the creditor. The borrower sells the house for an amount less than the unsettled mortgage debt, and the creditor agrees to accept this lesser amount and cancel the foreclosure. Similar to a short sale, a deed in lieu of foreclosure likely won’t damage your credit as harshly as a foreclosure or a bankruptcy. As noted above, the burden of selling your home shifts to somebody else, so it’s going to be more appealing than a short sale.
Cons of Short Sale
Credit score will be affected negatively.
It may take some time before you can purchase another home.
A lot of paperwork and the process itself is lengthy
A successful short sale will create a taxable occasion.
Some people think that a deed in lieu of foreclosure will cause less damage to their credit score than the damage caused by a foreclosure. But the difference in the effect on your credit by a deed in lieu or a foreclosure is minimal. Due to this reason, a deed in lieu might not be worth it unless the mortgage lender has agreed to forgive or make any reduction in the deficiency, as a part of the deal you receive some cash, or you are given some extra time to live in the house which should be longer than what you would have gotten if you had allowed the foreclosure to go through. In certain cases, the mortgage lender will usually agree to either one or more of these conditions to avoid the costly and lengthy foreclosure hassle.
Also an important point that should be taken into consideration is that how long will it take for you to get a new mortgage after the completion of a deed in lieu of foreclosure. For instance, Fannie Mae will buy loans that are made two years after the completion of a deed in lieu of foreclosure only in the case of extenuating circumstances, like medical bills, a divorce or loss of job that has caused you financial difficulty, in comparison to a standard three year waiting period after a foreclosure. Without the extenuating circumstances, the waiting period for Fannie Mae after a deed in lieu is four years and seven years for a foreclosure. The Federal Housing Administration (FHA) on the other hand has a similar waiting period for shorts sales, foreclosures and deeds in lieu, making the home loan insurance available after a period of three years.
If your property has a lot of equity, then a deed in lieu is probably a poor choice. Selling your property instead and paying of the debt would rather be a better option. If you think you don’t have enough time and a foreclosure is impending, then you might need to consider filing for bankruptcy with a plan of selling your property.
A deed in lieu of foreclosure consequences
A deed in lieu of foreclosure hands over the ownership of your property to the bank or the lender in order to prevent the foreclosure process. The end-result do resemble foreclosure but are less costly and less lengthy. In Ohio, a deed in lieu of foreclosure is transferring the ownership of a property to the lender in exchange for the cancellation of the debt. There are certain advantages and disadvantages to consider when signing up for a deed in lieu of foreclosure. It can greatly impact your taxes and your credit score.
Effect on your credit score
Signing over your property with a deed in lieu certainly relieves you from the financial pressure of filing for bankruptcy and going through the lengthy and costly foreclosure entail. Months of pending that can lead the mortgage to default will have your credit score diminish, more so when this leads to the foreclosure of your property. However, some creditors consider a deed in lieu less severe than foreclosure of property on your credit score.
Effect on your taxes
Concerning taxes, a deed in lieu can incur tax consequences because of the insufficiency or the amount that has been unrecovered after the sale of the property. IRS views forgiven debt as income. In turn, they may tax you afterwards. However, you may deem eligible for an insolvency exemption.
How to recover from a deed in lieu of foreclosure
As we know, a deed in lieu of foreclosure is an agreement that allows a property owner to avoid foreclosure by voluntarily turning over the property to the lender in exchange for being released from the financial obligations under the mortgage. The lender then sells the property to recover the financial loss.
Any time a consumer can get away without paying the full amount pending due to a debt of any sort, the predicted consequence is usually a serious damage to their credit score for a long time. You can expect to handle an additional hit from your deed in lieu of closure on top of the score drop already imposed because of the pending mortgage payments.
After this, you will have to spend the next few years re-establishing your credit before reaching a respectable score. And if you are planning to buy another property, this timetable can help you recover your credit score loss. Also regardless of the score, a waiting period of 4 years is required by most lenders following a deed in lieu. So during this time you can patiently managing your credit while allowing time do rest of the work in accelerating your score building process.
To improve your credit, following steps might prove to be useful.
Making all monthly and weekly payments from all open accounts in a timely manner.
Keeping all your open cards open and active with regular usage.
Holding your card debt down to a minimum. Try to carry your balance between 1 percent and 9 percent of your credit limits which is the ideal balance.
If your credit report doesn’t have any open revolving accounts or credit cards, get another secured card which needs a collateral for its approval, which could be a cash deposit with the issued institution to make your credit score look better.
Do you Think a Deed-in-Lieu of Foreclosure is the Ideal Move for You?
A deed-in-lieu of foreclosure may sound the ideal move to homeowners that are behind on their mortgage and don’t know how to repay the debt. However, this is not always the right solution. An experienced foreclosure defense attorney can help you understand all the alternatives to foreclosure and assist with choosing one that is right for your situation.
We are committed to helping those facing foreclosure find feasible options that can get them out of debt as soon as possible, and may even help them keep their home. Call us today at (888) 200-9824.
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