Understanding what is a deed in lieu of foreclosure is important for knowing all of a homeowner’s options available for foreclosure defense.
Foreclosure defense isn’t always about trying to keep a home. For some homeowners, getting rid of their home and avoiding foreclosure is a better option than attempting to save a home that the homeowner is not able to afford. Foreclosure defense is not about getting a free home; if a homeowner has no means to afford a modified mortgage loan payment, foreclosure is almost always inevitable.
With a deed in lieu of foreclosure, the homeowner voluntarily conveys the home to the bank or lender. The homeowner no longer owns the home, and the bank or lender becomes the record title owner. This is the same result that occurs in a foreclosure, with the exception that no foreclosure occurs: the homeowner has instead voluntarily given up the property. A deed in lieu of foreclosure helps a homeowner avoid the stress, hassle, and stigma of foreclosure, and lets them get rid of the property on their own terms. For a bank or lender, a deed in lieu of foreclosure saves the time and expense of having to do an often lengthy foreclosure proceeding.
Banks or lenders will generally only consider a deed in lieu of foreclosure if there are no encumbrances on the property, such as a lien or second mortgage. A foreclosure, with few exceptions, provides a foreclosing entity with a “clean” title: all encumbrances second to the lender’s interest are wiped out in a foreclosure. In contrast, if a lender accepts a property with a lien on it, this lien remains on the property, making it difficult to resell.
Homeowners interested in a deed in lieu of foreclosure can contact their loan servicers to see if this option is available to them. Compared to a loan modification, a deed in lieu of foreclosure is generally a straightforward process. Homeowners, however, should still speak with an attorney to review their paperwork and ensure the process is done to their advantage. It is important, for example, that any potential deficiency judgment coming from the deed in lieu of foreclosure is waived by the lender, and the tax consequences of one of these deals is considered.