Deed In Lieu Process and Tips
For homeowners hoping to avoid foreclosure, there are a myriad of tactics each designed for specific home loss situations to turn to. One option is a deed in lieu of foreclosure, a loss mitigation option– along with others such as short sales, loan modifications, and forbearances– available to borrowers in financial distress and facing the unfortunate circumstances of having their properties taken away.
With a deed in lieu transaction, the homeowner voluntarily transfers the title of the property to the holder of the loan (the bank) in exchange for a release from any mortgage obligations. In most cases, completing a deed in lieu releases borrowers from all obligations and liability under the mortgage.
In some cases, a lender might allow the homeowner to continue to live in the home even after turning over the deed. Fannie Mae, for example, offers this option with its Deed-in-Lease Program, where a borrower who is eligible for a deed in lieu and who indicates an interest in remaining in the property as a tenant following the deed in lieu process may lease it from Fannie Mae for 12 months at market rate.
To further help those just starting the process of a deed in lieu, here is a general outline of what to expect along the way—as well as some possible pitfalls to make sure to avoid.
The Deed in Lieu Process
While the general features of any deed in lieu of foreclosure process varies, it usually occurs when a homeowner falls behind on mortgage payments, leading to the negotiation of a deal between them and a lender for the homeowner to vacate the property in good condition as well as sign over all rights to the home.
The homeowner will typically provide proof of income and financial information along with evidence that the home has not or cannot sell for what is owed when selling at fair market value. The entire transaction is deemed as complete once the homeowner signs all necessary deed in lieu paperwork.
1. The first step in obtaining a deed in lieu is for the borrower to request a loss mitigation package from the loan servicer (the company you make your mortgage payments to). The application will need to be filled out and submitted with documentation pertaining to the borrower’s income and expenses included, such as recent tax returns, financial statements detailing monthly income and expenses, proof of income (generally two recent paystubs), bank account statements, and a hardship letter or hardship affidavit. Hardships that qualify for loss mitigation consideration include everything from job loss or reduced income to sudden illness, death of spouse, medical expenses, divorce, and a natural disaster.
2. Next, the loan servicer will order a title search. Banks usually only accept a deed in lieu of foreclosure on a first mortgage. There can be no additional liens, such as second mortgages, judgments from creditors, or tax liens existing on the property.
3. Once the bank agrees to accept the deed in lieu, the borrower needs to sign a grant deed in lieu of foreclosure, which is the official document transferring ownership of the property to the bank. An estoppel affidavit will also need to be signed—this sets out the terms of the agreement between the bank and the borrower and will include a provision that the borrower acted freely and not under any coercion.
A deed in lieu of foreclosure can be very beneficial to both a lender and a borrower, enabling both to avoid the time and expense of foreclosure. If you are asked to underwrite a deed in lieu of foreclosure and want to learn more information on basic requirements or how to partake in any other foreclosure program, please contact Peak Corporate Network to draw on our power and inclusive range of services to help you save time and money all while maximizing on the value of your assets.