Requesting a “deed in lieu” is simply asking your lender to take the deed to your house in exchange for canceling your mortgage. Your lender takes the keys instead of (“in lieu of”) foreclosing.
You should be aware that a Deed in Lieu will have an impact on your credit. You should examine your credit report to determine what impact the foreclose process is having on your credit.
Are there other liens on your house? If you took out a loan to refinance or to get a personal line of credit, those loans are probably secured with a 2nd or 3rd mortgage.
You are still responsible for those loans even with a deed in lieu. The liens also remain attached to the property. If your lender agrees to a deed in lieu it takes title to your house with those liens.
If the lender goes through the foreclosure process instead, those secondary liens also foreclose. Therefore, it is usually not in the lender’s interest to accept a deed in lieu of foreclosure where there are additional liens.
Not many lenders are willing to assume those commitments unless there is a lot of equity in your house.
If your lender accepts a deed in lieu of foreclosure, the value of the house to a prospective foreclosure sale buyer is reduced when liens are still attached.
Giving the deed to the lender in a mortgage state makes the lender the owner canceling the lender’s lien. Junior lenders get promoted to first position and can institute foreclosure. This result is prevented with a carefully drafted agreement stating that there is not a merger of ownership and mortgage interests.
You may agree to give a deed in lieu of foreclosure to be relieved of the stress and financial burden of foreclosure. Even if these are your motivations you should consider getting something extra in exchange for giving the deed to the lender. Write a letter to your lender (here’s a sample.) You might ask for one of the following:
You may ask for a payment for attorney’s fees and other costs associated with the foreclosure.
If you have any equity in the property you can ask for at least a partial payment for relinquishing it. Whether your lender will be willing to pay will depend on the financial benefit from taking over the property rather than proceeding with a foreclosure sale.
Release of third-party liabilities. If you have any liabilities in connection with the property, such as amounts owed to a contractor for re-modeling work, you can ask that the lender assume these liabilities.
If you are insolvent the lender will probably refuse to consider a deed in lieu. If you file bankruptcy after giving your deed to the bank, the bankruptcy court may reverse the transaction. The court may view the transaction as giving your lender preferential status and set it aside as a fraudulent conveyance. No problem arises if you are solvent at the time you give the deed to the lender. If the lender gives you a cash payment for the deed as well as cancellation of the note, the transaction may be treated more favorably by the bankruptcy court.
- If you consider using a deed in lieu of foreclosure, talk with an attorney before signing any documents.
The information on this website can help you discuss issues more confidently with your lender, attorney or other advisor.
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