What Is A Deed In Lieu Of Foreclosure?

A deed in lieu of foreclosure is an agreement between a homeowner and a mortgage lender in which the homeowner voluntarily gives the deed of their home to the mortgage lender to avoid foreclosure. A deed in lieu agreement may not be the best decision for all homeowners, but it could be an option for those who have exhausted all other resources to stop foreclosure or want to prevent bankruptcy and subsequent damage to their credit score.

Although a deed in lieu of foreclosure avoids foreclosure, it should still be a homeowner’s last option. If you are a homeowner facing foreclosure and don’t want to give up the title of your property with a deed in lieu agreement, you may find some solace knowing that you have other options to stop foreclosure on your home.

To figure out how you can delay or stop your foreclosure, call Denbeaux & Denbeaux Law today to discuss your options with a trusted NJ foreclosure defense attorney.

What Is The Difference Between A Deed In Lieu And Foreclosure?

A deed in lieu of foreclosure and a foreclosure both happen because a homeowner has fallen behind on their mortgage payments and the debt needs to be repaid. However, the main difference is who initiates the process and how the lender is repaid.

In a foreclosure, the lender initiates the process. After several mortgage payments have been missed, the lender will begin the foreclosure process. In many states, this involves filing a lawsuit and going through the court system, where the court determines whether the property can be foreclosed on. If the court agrees with the lender, the home is typically sold at a sheriff’s sale, and the lender will use the proceeds to repay the mortgage debt.

In a deed-in-lieu, the homeowner initiates the process. To avoid the foreclosure process, the homeowner will offer ownership of the home to the lender to settle the mortgage debt.

Deeds in lieu are disfavored by borrowers because it ends up with the house being transferred out of their name, but they are also disfavored by the mortgage companies because that title transfer includes all clouds, inferior liens and other problems that may have come into existence during the homeowners’ ownership of the property.

There are no real benefits to either the homeowner or the mortgage company for deeds in lieu of foreclosure and it is rarely used for that reason.

What makes someone eligible for a deed in lieu of foreclosure?

In a deed of lieu of foreclosure, a homeowner is asking the lender to essentially accept the home itself as payment for the mortgage debt. If the lender agrees, ownership of the home is transferred to the lender, and the lender will typically try to sell the home to recover the debt that is owed. Because taking ownership of the home can come with risks, lenders want to make sure it’s in their best interest before approving a request for a deed-in-lieu of foreclosure. To do this, they must meet several eligibility requirements.

The exact eligibility criteria will vary by loan type (such as a conventional, VA, or FHA loan) and lender. That said, the general conditions that make someone eligible for a deed in lieu of foreclosure are:

Qualifying Financial Hardship

One of the main things lenders will look at is the reason why you are unable to make your existing mortgage payments, or your “hardship.” Simply not being able to afford your payments is not enough. Your lender will look to see if you have a qualifying hardship, typically a situation that was unavoidable or outside your control, which then causes the financial hardship. This could include things like job loss, divorce, unexpected medical expenses, or the death of a spouse. Most lenders will require you to provide documentation, such as income statements, tax returns, medical bills, or divorce paperwork, to prove your hardship.

“Good Faith” Attempt To Sell Your Home

Most lenders will want to see that you made a “good faith” attempt to sell your home before requesting a deed-in-lieu. Generally speaking, a good-faith attempt means the home was listed for at least 3 to 4 months on the market and was not sold at a price that would help you pay off the loan.

Property Condition

Because lenders will sell the home after ownership transfers, they want to confirm that the property is in reasonable condition. Typically, lenders are looking to see that your home could be sold for a fair price without them needing to spend money on repairs or upgrades.

No Additional Liens

Most lenders will want to confirm that there are no additional liens on the property that they would be responsible for if they were to take ownership of your home, such as tax liens or second mortgages.

Property Type & Status

Some lenders will only consider a deed in lieu if the property is your primary residence. Depending on the lender and loan type, second homes or investment properties may not qualify.

What Are The Steps To Submit A Deed In Lieu Of Foreclosure?

The process for submitting a deed-in-lieu of foreclosure will vary by lender. However, the general process is as follows:

Step 1: Speak With An Attorney

While it’s not required, it is usually in a homeowner’s best interest to speak with an attorney before agreeing to a deed in lieu of foreclosure. An attorney can help you understand whether a deed in lieu is truly your best option and explain other alternatives that may be available. If you do decide to move forward, an attorney can also help guide you through the process, prepare your application, and negotiate with the lender to make sure the terms are fair.

Step 2: Contact Your Lender

Start by reaching out to your lender’s loss mitigation department and letting them know you are considering a deed-in-lieu of foreclosure. Find out what their specific eligibility requirements are and clarify what documents need to be submitted to start the application process.

Step 3: Satisfy Eligibility Requirements

Review your lender’s eligibility requirements and take the necessary steps to make sure you satisfy the eligibility requirements. For example, if your lender requires you to have made a “good faith” effort to sell your home, make sure your home has been listed to match their criteria.

Step 4: Submit the Application

Most lenders will require you to complete an application to request a deed in lieu. As part of this process, you will usually need to explain your financial hardship and provide supporting documentation. This may include things like income statements, tax returns, bank statements, or other documents showing why you are no longer able to afford the mortgage payments.

Step 5: Title Search

If your initial application is approved, your lender will get a title search to determine if there are any additional liens on the property

Step 6: Appraisal

The order will request a broker’s price opinion (BPO) or appraisal to determine the home’s current value and help them decide whether accepting the deed makes sense.

Step 7: Negotiation

After the lender reviews the property and your financial information, the next step is usually negotiating the terms of the agreement. This can include things like the value the property will be transferred for, how long you will have to move out after the deed is signed, whether the lender will forgive any remaining mortgage balance after taking the property, and how the situation will be reported to the credit bureaus.

Step 8: Sign the Deed in Lieu Agreement

Once the terms are finalized, you will sign the deed in lieu agreement and related documents, typically in front of a notary. At that point, ownership of the property is transferred to the lender.

Why Might A Lender Reject A Deed In Lieu Of Foreclosure Application?

From the lender’s perspective, the purpose of a deed-in-lieu of foreclosure is to help them recover the money they are owed. However, accepting a deed in lieu means the lender will become the owner of the home and will likely be responsible for selling it themselves.

Because of this, many of the reasons a lender might reject a deed-in-lieu application come down to whether they believe the property will help them recover the debt and whether the homeowner has made a genuine effort to resolve the situation before asking the lender to take ownership of the home. Some examples include:

The lender determines that the homeowner does not have a qualifying hardship and will be able to make the original mortgage payments
The lender feels that the homeowner has not made a “good faith” effort to sell the home
There are additional liens or judgments on the property that the lender would be responsible for when ownership is transferred, reducing the amount of money they can recover.
The property is in poor condition and cannot be able to be sold to recover the mortgage balance without repairs or upgrades

Why Would A Lender Accept A Deed In Lieu Application?

A lender is likely to accept a deed-in-lieu application if they believe it is in their best interest, compared to other options such as foreclosure. Some reasons a lender would accept a deed in lieu application are:

You meet all of your lender’s basic criteria
The lender believes that the deed-in-lieu is in their best financial interest (they will be able to recover the largest amount of money through a deed-in-lieu compared to foreclosure)
Your lender wants to avoid litigation (which is part of the foreclosure process) to save time and money

Advantages Of A Deed In Lieu Of Foreclosure

Although a deed in lieu of foreclosure may not be the best option for everyone, homeowners should consider the advantages of acquiring a deed in lieu of foreclosure, especially if they have already exhausted other forms of foreclosure avoidance. Some benefits include:

Less Damage To Credit Report. A deed of lieu agreement causes less damage to your credit report than a foreclosure or bankruptcy. A deed of lieu of foreclosure is on your credit report for four years compared to the seven years foreclosure is shown.
Receive Moving Assistance. There are cases where the lender is willing to help pay for moving costs and may assist in relocation if they want to take control of the property quickly. The lender isn’t required to help, though, so this can be denied when requested.
Avoid Further Financial Loss. In New Jersey, you could be held liable for the difference between the cost of the property and how much you owed the lender, also known as a deficiency judgment, but you can negotiate this. When negotiating a deed of lieu agreement, you can ask the lender not to hold you liable for that debt.
Less Publicity. When a homeowner goes under foreclosure, they are notified by a foreclosure notice which is typically attached to the front of your door for all neighbors and passersby to see, which can be embarrassing to some. For that reason, homeowners would rather just give their home to the lender in a deed in lieu of foreclosure to avoid the public eye.

These advantages might make a deed in lieu of foreclosure seem like a good idea, but there are numerous disadvantages that one should keep in mind. It could seriously impact the homeowner and future home-buying prospects. A deed in lieu of foreclosure should not be taken lightly and should only be pursued when it is the last option.

Disadvantages Of A Deed In Lieu Of Foreclosure

Although a deed of lieu may seem to be the better option for you and your situation, it still has significant drawbacks. A homeowner should know these before proceeding with a deed of lieu agreement:

Still Causes Significant Damage To Credit. A deed of lieu of foreclosure will still be reported on your credit for the next four years, making it difficult or nearly impossible to receive a mortgage anytime in the foreseeable future. Your credit score will also receive a minimum of negative 125 points.
Tax Liability. Certain cases require the homeowner to be held responsible for paying taxes on the debt forgiven by the mortgage lender since it can be considered taxable income.
Not Guaranteed. A lender does NOT need to agree with a deed in lieu of foreclosure. They have the right to refuse and may do so. A lender could refuse if the property is depreciating in value or if there are any liens on your property since assuming ownership of the property would be non-beneficial to the lender.
Loss Of Property. This disadvantage is a given in this situation. You will lose your home to the bank, considering you voluntarily give up your home and the rights to fight against foreclosure. You’ll have to move out quickly in most cases.

Although getting a deed in lieu of foreclosure can have some benefits, the disadvantages usually outweigh the good. Ultimately, how you decide to avoid foreclosure will be up to you and what option is best for your particular situation will be up to you. If you want to know all your options, you can contact Denbeaux & Denbeaux Law today to set up a free consultation.

Is A Deed In Lieu Of Foreclosure Right For Me?

In most cases, a homeowner should explore every other form of foreclosure avoidance before deciding that a deed in lieu agreement is the right choice. Forbearance, loan modification, and a short sale are all different options a homeowner can take, just to name a few. However, there are specific qualifications a homeowner needs to be eligible for other forms of loss mitigation.

You might feel like you have tried all other options to save your home from foreclosure, and getting a deed in lieu is your final hope. In that case, you should consider the advantages and disadvantages of getting a deed in lieu of foreclosure on you and your financial future before making such a significant decision.

Before you decide to use a deed in lieu of foreclosure, speaking with a foreclosure attorney may help you understand if it is indeed the last option you have. Contact us to talk with attorney Josh Denbeaux about your situation.

Still Have Questions? Contact A Foreclosure Attorney Today

Deciding whether or not you should get a deed in lieu of a foreclosure agreement can be challenging. The agreement can trick homeowners into believing they don’t owe anything to the lender, servicer, or state and later be held liable for some payment.

A deed in lieu of foreclosure could be helpful for your situation, but it should be the last option you pursue as a homeowner. You can get help from a knowledgeable attorney to see if there’s anything else you can do to save your home from foreclosure before resorting to deed in lieu of foreclosure.

Denbeaux & Denbeaux Law has helped represent over 2,000 NJ homeowners since 2008, which has allowed us to gain extensive knowledge and experience assisting homeowners through the foreclosure process by offering foreclosure avoidance services like loan modifications, forbearance, loss mitigation, and more.