Expert Foreclosure Help

What is Deed in Lieu of Foreclosure?

Deed in lieu of foreclosure is a legally binding contract allowing borrowers to return their home to the lender and avoid undergoing the foreclosure process. Once mortgage lenders agree to engage in deed in lieu transactions they take immediate possession of the real estate.

The primary advantage of deed in lieu of foreclosure is it grants borrowers immediate release from mortgage debt. Borrowers vacate the premises, return the keys, and walk away. However, certain protocol must be followed.

Deed in lieu is a voluntary agreement between lending institutions and borrowers. A contract must be executed, signed by both parties, notarized and submitted through the courts to be legally binding.

This is referred to as Parole Evidence Rule; a principle of the Common Law of Contracts. The parole evidence rule protects mortgage lenders from later claims by borrowers claiming they were under pressure from the bank to enter into the deed in lieu of foreclosure agreement.

In order for real estate to qualify for deed in lieu agreements, the home must be owner-occupied. Borrowers are prevented from vacating the property or leaving it empty during deed in lieu negotiations. The property cannot be used for investment purposes such as a residential rental or commercial property.

Borrowers must be at least 31 days delinquent on their mortgage note and provide documentation proving they are financially insolvent and unable to pay future home loan payments. Most lenders will attempt to provide borrowers with a loan modification or enter into a short sale agreement before offering the option of deed in lieu.

Not all lending institutions engage in deed in lieu of foreclosure. Homeowners who have become delinquent with mortgage payments or are in the pre foreclosure phase should contact their bank’s loss mitigation department. Loss mitigators are bank employees whose job is to help borrowers avoid foreclosure if possible.

Certain eligibility requirements must be met before banks consider deed in lieu agreements. In most cases, lenders will not engage in this type of real estate transaction if borrowers owe more on their home loan than the appraised property value.

Discuss available options with a real estate attorney before entering into deed in lieu of foreclosure or short sale agreements. Many lenders issue deficiency judgments for the difference between mortgage loan balances and the property sale price.

Loan deficiencies can amount to several thousand dollars. If borrowers are unable to pay the difference in full, lenders issue a judgment which remains on credit reports until paid in full. Deed in lieu judgments can lower credit scores by 100 points or more.

While deed in lieu of foreclosure can offer financial relief, it can cause long-term damage to credit and cost borrowers more money than entering into foreclosure. All options should be considered before making a final decision.

Simon Volkov is a real estate investor who specializes in buying distressed properties in Orange County and southern California. Simon is a published author and provides numerous articles regarding deed in lieu of foreclosure, short sales, loan modifications and working with bank loss mitigators. Learn more by visiting http://www.SimonVolkov.com.