Deed in Lieu Process

Definition

A deed is used to transfer real estate from one entity to another. When you purchased your home, a deed was completed that placed your name (and your mortgage company) on the title of the home and removed the previous owner. If you are facing foreclosure or have not been able to make your mortgage payments, a deed in lieu is a document that, essentially, gives your property back to the lien holder, instead of experiencing a foreclosure.

Financial Hardship

In order to qualify for a deed in lieu, most mortgage companies will require that you prove that you can no longer afford the payments. The fact that your property has declined in value and may be worth less than what you owe may not be a factor that qualifies for a deed in lieu. Call your lender and explain your situation. If the representative determines that you meet the requirements, you will need to complete a financial hardship application, write a letter explaining your situation and provide financial documents proving that you are unable to meet your mortgage payment. By receiving approval from your lender first, your debt may be canceled and you will no longer owe the balance of your loan. Typically, you must have only one loan on the property to qualify. Also, depending on your tax status, you may not have to report the forgiven amount on your income tax return.

Sale Attempt

Most lenders will require that you have made an attempt to sell your house for fair market value before considering approval for a deed in lieu. Generally, depending on the mortgage holder, you will need to have had an active listing for 30 to 90 days or longer before you can apply. If you short sell your home, then the lender is accepting an amount for less than what you owe on your mortgage, and you cannot recover any equity that you may have accumulated. Therefore, it may not matter to you whether you are approved for a short sale or a deed in lieu. In relation to your credit rating, both will impact you negatively with similar drops in your credit score and recovery period.

Alternatives

It may be in your best interest to consider alternatives other than a deed in lieu of foreclosure. If you are completing a financial hardship packet, you should ask for a loan modification first, especially if you have some income. The bank can choose to change the terms of your loan or may deny a modification, but this will help you stay in your home and be able to afford it. Alternatively, a less than favorable option is to file for bankruptcy. This will bring a stop to foreclosure and collection proceedings. However, it will have the worst impact on your credit rating and recovery than any other alternative.