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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, in addition to short sales, loan adjustments, repayment strategies, and forbearances. Specifically, a deed in lieu is a transaction 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.

For the most part, a deed in lieu will release the customer from all responsibilities 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 ask for a loss mitigation package from the loan servicer (the company that manages the loan account). The application will need to be filled out and sent in addition to documents about the borrower's income and costs consisting of:

- evidence of earnings (usually 2 recent pay stubs or, if the debtor is self-employed, a revenue and loss declaration).

• current income tax return.
• a financial declaration, detailing month-to-month income and expenses.
• bank declarations (typically two current declarations for all accounts), and.
• a hardship letter or difficulty affidavit.
  
  What Is a Difficulty?
  
  A "difficulty" is a situation that is beyond the borrower's control that results in the borrower no longer having the ability to afford to make mortgage payments. Hardships that get approved for loss mitigation consideration consist of, for example, job loss, lowered earnings, death of a partner, disease, medical expenditures, divorce, rate of interest reset, and a natural catastrophe.
  
  Sometimes, the bank will need the borrower to attempt to sell the home for its fair market value before it will think about accepting a deed in lieu. Once the listing period expires, assuming the residential or commercial property hasn't offered, the servicer will order a title search.
  
  The bank will usually only accept a deed in lieu of foreclosure on a first mortgage, suggesting there should be no extra liens-like second mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this general rule is if the same bank holds both the very first and the 2nd mortgage on the home. Alternatively, a customer can select to pay off any additional liens, such as a tax lien or judgment, to help with the deed in lieu deal. If and when the title is clear, then the servicer will schedule a brokers rate opinion (BPO) to identify the reasonable market value of the residential or commercial property.
  
  To finish the deed in lieu, the borrower will be required 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 agreement in between the bank and the debtor and will include a provision that the borrower acted easily and willingly, not under coercion or pressure. This document might likewise consist of arrangements dealing with whether the deal is in full fulfillment of the debt or whether the bank can seek a shortage judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is frequently structured so that the transaction satisfies the mortgage debt. So, with the majority of deeds in lieu, the bank can't get a deficiency judgment for the difference between the home's reasonable market value and the financial obligation.
  
  But if the bank wishes to protect its right to seek a shortage judgment, the majority of jurisdictions allow the bank to do so by plainly specifying in the transaction files that a balance remains after the deed in lieu. The bank usually needs to define the quantity of the deficiency and include this amount in the deed in lieu files or in a different contract.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu also often depends upon state law. Washington, for example, has at least one case that states a loan holder may not get a shortage judgment after a deed in lieu, even if the factor to consider is less than a complete 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 security 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 customer who is eligible for a deed in lieu has 3 alternatives after completing the transaction:
  
  - moving out of the home immediately.
• entering into a three-month shift lease without any rent payment needed, or.
• participating in a twelve-month lease and paying rent at market rate.
  
  For more details on requirements and how to partake in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be qualified 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 against a house owner as part of a foreclosure or after that by submitting a separate lawsuit. In other states, state law prevents 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 might be better off letting a foreclosure occur rather than doing a deed in lieu of foreclosure that leaves you liable for a shortage.
  
  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 money as part of the deal, or you get additional time to stay in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific suggestions about what to do in your particular scenario, talk to a regional foreclosure legal representative.
  
  Also, you should take into account for how long 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 scenarios, like divorce, medical bills, or a task layoff that caused you economic difficulty, 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) treats foreclosures, short sales, and deeds in lieu the very same, typically making it's mortgage insurance coverage offered after three years.
  
  When to Seek Counsel
  
  If you require help comprehending the deed in lieu procedure or analyzing the files you'll be required to sign, you should think about talking to a qualified attorney. A lawyer can likewise help you negotiate a release of your personal liability or a lowered deficiency if essential.