The following information is not legal advice and should not be used as legal advice, please consult an attorney for legal advice.
A Deed in Lieu of Foreclosure has advantages and disadvantages. Generally, lenders don’t often offer a Deed in Lieu of foreclosure to homeowners. Some homeowners or real estate investors, consider getting a lender to agree to allow a Deed in Lieu of foreclosure a good thing. However, there are many factors to consider and we will go over them.
The borrower is often considered the big winner in a Deed in Lieu of foreclosure situation and this all depends on what the borrower/ homeowner is wanting to do. If the borrower/ homeowner wants to keep the property, a Deed in Lieu of Foreclosure is not the best option.
The purpose of the Deed in Lieu of Foreclosure is for the borrower to convey all interest in the property over to the lender to satisfy the loan default. Which will allow the borrower/ homeowner to avoid foreclosure.
However, the borrower/ homeowner will not be able to keep the property and possession of the property goes back to the lender to sale, etc.
For a borrower/ homeowner wanting to avoid foreclosure and not having to go through public notoriety of foreclosure, this option is perfect. It will allow the borrower to not have to deal with public shame or investors sending them mass letters in their mailbox to purchase the property.
Any junior liens will be the assumable liability of the lender in a Deed in Lieu of foreclosure situation. For this reason, lenders rarely prefer to do Deed in Lieu of Foreclosure when the borrower/ homeowner have a second mortgage also known as a junior lien.
The lender must pay off any debt (junior liens) the borrower/ homeowner has attached to the property before executing a Deed in Lieu of Foreclosure, including;
- Any second or third mortgages.
- Home equity lines of credit (HELOCs).
In a foreclosure proceeding, the lender remains in the first position and the foreclosure clears the title and restores the title to a clear and free marketable title. Which also makes foreclosing more attractive to lenders over Deed in Lieu of Foreclosure sale.
The mortgage loan indebtedness must be secured by the property that is to be transferred. The transaction must be voluntarily by both parties and made in good faith on both sides.
The settlement agreement must be at or equal to the fair market value of the property being conveyed over to the lender in the Deed in Lieu of Foreclosure.
In situations where the borrower/ homeowner has an outstanding balance that exceeds the fair market value of the property being conveyed, the settlement agreement should also state that the lender will agree to it. Many lenders would rather agree to this, opposed to having to battle the homeowner in court over foreclosure.
A Deed in Lieu of Foreclosure is still damaging for credit history. Most homeowners think that a Deed in Lieu of Foreclosure is much better than a Foreclosure.
However, a Deed in Lieu stays on the credit report for up to seven years and this is the exact same amount of time a foreclosure remains on credit reports as well.
Why Are Lenders Offering Deed in Lieu of Foreclosure?
Borrowers/ Homeowners are reporting that more lenders are offering Deed in Lieu of Foreclosure oppose to foreclosing on properties.
This could have many results of securitization flaws with mortgages. Where lenders would face a harder time proving that they actually own the mortgage loan to foreclose on it.
So it would make sense for lenders to seek to offer a Deed in Lieu of Foreclosure oppose to having “SHOW” how they own the property by proving it in court. Many lenders also have issues with lost note affidavits.
For this very reason, borrowers/ homeowners need to get educated on TILA fraud violations to learn WHO is the actual and true owner of the mortgage loan.
Workout a better solution over foreclosure or Deed in Lieu of Foreclosure by forcing the lender into negotiation stages. Making the situation a win-win!
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