Tips for Obtaining Deed in Lieu of Foreclosure from Mortgage Lenders

Tips for Obtaining Deed in Lieu of Foreclosure from Mortgage Lenders

Deed in lieu of foreclosure refers to a special type of agreement offered to borrowers who can no longer afford their mortgage payments. When banks offer deed in lieu, borrowers are allowed to return their home without having to endure the foreclosure process. Once contracts are signed banks take immediate possession of the property.

The primary benefit of deed in lieu of foreclosure is borrowers are released from mortgage debt. Debtors vacate the home, return the keys to the lender, and walk away. However, specific protocol must be followed to ensure proper documents are filed and property transfers recorded through the court.

The downside of deed in lieu contracts is they destroy credit. Credit bureaus interpret deed in lieu as foreclosure and this blemish remains on credit reports for up to 10 years. If lenders issue deficiency judgments, deed in lieu could potentially be reported for up to 7 years after the debt is paid in full.

Borrowers should anticipate a FICO score decrease of 100 points or more. In cases of foreclosure and bankruptcy there is little that can be done to repair credit. Initially, deed in lieu is detrimental to FICO scores, but it lessens as time passes. Borrowers can build positive credit by paying debts on time.

Deed in lieu agreements are entered into on a voluntary basis. To be legally binding, contracts must be executed, signed by borrowers and their servicing lender, notarized, and submitted through the courts. This is referred to as Parole Evidence Rule which protects mortgage lenders in the event borrowers later claim they were pressured by the bank to enter into a deed in lieu contract.

Borrowers must adhere to certain criteria set forth by the bank. Only properties that are owner occupied qualify for deed in lieu of foreclosure. Investment properties and vacation homes are exempt and do not qualify. Banks usually do not offer deed in lieu when borrowers owe more than the appraised property value.

Mortgage financiers will not entertain the option of deed in lieu until borrowers are at least 31 days delinquent. Most banks reserve deed in lieu of foreclosure as a last resort and usually offer borrowers the option of loan modification, mortgage refinance or forbearance agreement first.

Borrowers will work with an assigned bank loss mitigator throughout the process. Protocol varies by lender but most require homeowners to submit a foreclosure hardship letter, along with proof they are financially insolvent.

Many banks issue deficiency judgments which hold borrowers responsible for the difference between their loan balance and property sale price. If a borrower owed $100,000 and the bank sells the property for $90,000 the previous homeowner must pay the bank $10,000. Obviously this is the worst case scenario.

Always negotiate with lenders to obtain a 'Payment in Full' deed in lieu agreement which releases borrowers from the home without owing additional funds. If necessary, retain the services of a real estate lawyer or foreclosure specialist to negotiate on your behalf.

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