Deed in Lieu of Foreclosure 101
What the heck is a deed in lieu? Or…is it deed in lieu of foreclosure? There’s confusion just in the wording, right? I totally get it.
Here’s the deal. When a borrower gets behind on mortgage payments, most institutional lenders won’t hesitate to begin the foreclosure process (taking back the property).
But, there is another option: a deed in lieu of foreclosure.
Deed = A legal document transferring the title of the asset from one party to another. In our world: property from the borrower to the lender.
In lieu = “instead of”
Foreclosure = Repossessing the property
Here’s a simple deed in lieu of foreclosure scenario:
The borrower is behind on a property worth $100,000 and wants to get out of the loan (and property)
The borrower owes $40,000 (so he/she has $60,000 in equity)
The borrower approaches the lender and says, “Will you take the property off our hands, including the $60,000 in equity, and we’ll walk away?”
Now…there are benefits to both the lender and the borrower in a deed in lieu transaction. The lender gets quicker control of the property—offering the opportunity to maximize the value of the property (particularly important in a state with extended foreclosure timelines, which tend to be the judicial foreclosure states). And the borrower gets to avoid the “foreclosure” stigma and all the damage it can create on their credit. The borrower may also be getting out from under a situation that would continue to drive them deeper into hardship.
When completing a deed in lieu, the lender must be aware of certain items on titles such as any junior liens like a second mortgage, any judgments, or tax liens because these generally need to be satisfied and released to get a clean title. If the lender is insured by the U.S. Department of Housing and Urban Development (HUD), HUD will, in some cases, allocate up to $2,000 to pay off a second lien in determining eligibility for a deed in lieu.
The next step in the deed in lieu process is for the lender to get a broker price opinion (BPO) to evaluate the current market value of the property.
Once the lender accepts the deed in lieu, the borrower signs a grant deed in lieu of foreclosure to transfer ownership of the property to the lender. An estoppel affidavit is also signed, which outlines the agreement between the lender and the borrower and affirms the borrower acted freely and voluntarily without coercion or duress.
To summarize, the deed in lieu of foreclosure transaction requires an absolute involuntary conveyance, proper turnover of the property, title insurance, and proper settlement of applicable tax.
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