Deed-in-Lieu of Foreclosure
A deed-in-lieu of foreclosure is a process that occurs when a homeowner voluntarily offers the deed to the property back to the mortgage holder. The homeowner essentially moves out of the property and freely gives it back to the lender without forcing the lender to foreclose. Once the lender accepts the deed-in-lieu, the homeowner is no longer responsible for the mortgage debt. The lender can then sell the house to repay the mortgage debt.
Avoid Deficiency Judgment
One of the major benefits of offering a deed-in-lieu of foreclosure is that it can help you avoid a deficiency judgment. When you simply allow the lender to foreclose on the home, the lender may not be able to get enough to cover the outstanding mortgage balance when the property is sold. In this case, the lender could come after you for the amount that is remaining on the loan. If you offer a deed-in-lieu, the lender accepts the title and writes off the remaining debt.
Credit Impact
Both a foreclosure and a deed-in-lieu of foreclosure will significantly impact your credit score in a negative manner. With either one of these arrangements, you do not live up to your end of the original agreement. However, future potential creditors may consider a deed-in-lieu of foreclosure more favorably than a foreclosure. It also gives you the opportunity to get started rebuilding your credit sooner than if you used a foreclosure. Foreclosures tend to drag on for months and in that amount of time, you could have been building up your credit score again.
Short Sale
In many cases, homeowners turn to a deed-in-lieu of foreclosure after they have failed to complete a short sale. A short sale is an arrangement in which you find a buyer for the property. The buyer pays less than what you owe on the mortgage. To make this work, you have to get the lender to accept the offer. If the lender will not take the offer, you may have no choice but to allow a deed-in-lieu or a foreclosure.
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