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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, in addition to brief sales, loan adjustments, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the property owner willingly moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

Most of the times, completing a deed in lieu will release the borrower from all responsibilities and liability under the mortgage agreement and promissory note.

How Does a Deed in Lieu of Foreclosure Work?
Deficiency Judgments Following a Deed in Lieu of Foreclosure
Mortgage Release Program Under Fannie Mae
Should You Consider Letting the Foreclosure Happen?
When to Seek Counsel
How Does a Deed in Lieu of Foreclosure Work?

The first action in getting a deed in lieu is for the debtor to request a loss mitigation plan from the loan servicer (the company that manages the loan account). The application will need to be submitted and sent along with documentation about the customer's income and expenses consisting of:

- proof of income (usually two current pay stubs or, if the customer is self-employed, an earnings and loss declaration).

• current tax returns.
• a financial declaration, detailing monthly earnings and costs.
• bank statements (typically 2 current statements for all accounts), and.
• a difficulty letter or hardship affidavit.
  
  What Is a Challenge?
  
  A "difficulty" is a situation that is beyond the debtor's control that results in the borrower no longer being able to afford to make mortgage payments. Hardships that receive loss mitigation consideration consist of, for instance, task loss, reduced earnings, death of a spouse, disease, medical expenditures, divorce, rate of interest reset, and a natural disaster.
  
  Sometimes, the bank will need the customer to try to offer the home for its reasonable market price before it will think about accepting a deed in lieu. Once the listing duration ends, presuming the residential or commercial property hasn't sold, the servicer will purchase a title search.
  
  The bank will typically just accept a deed in lieu of foreclosure on a very first mortgage, implying there need to be no additional liens-like second mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the exact same bank holds both the first and the 2nd mortgage on the home. Alternatively, a borrower can choose to settle any extra liens, such as a tax lien or judgment, to assist in the deed in lieu deal. If and when the title is clear, then the servicer will arrange for a brokers rate viewpoint (BPO) to determine the fair market price of the residential or commercial property.
  
  To complete the deed in lieu, the debtor will be required to sign a grant deed in lieu of foreclosure, which is the file that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the arrangement between the bank and the customer and will consist of an arrangement that the borrower acted freely and willingly, not under browbeating or duress. This document may also consist of arrangements dealing with whether the deal is in complete satisfaction of the financial obligation or whether the bank deserves to look for a deficiency judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is frequently structured so that the deal satisfies the mortgage debt. So, with the majority of deeds in lieu, the bank can't get a shortage judgment for the difference in between the home's fair market worth and the debt.
  
  But if the bank wishes to maintain its right to seek a deficiency judgment, the majority of jurisdictions allow the bank to do so by plainly mentioning in the transaction documents that a balance stays after the deed in lieu. The bank typically needs to specify the quantity of the shortage and include this amount in the deed in lieu files or in a different arrangement.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also in some cases depends upon state law. Washington, for example, has at least one case that states a loan holder might not acquire a deficiency judgment after a deed in lieu, even if the consideration is less than a complete discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that since the deed in lieu was successfully a nonjudicial foreclosure, the debtor was entitled to defense under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you might be qualified for its Mortgage Release (deed in lieu) program. Under this program, a customer who is eligible for a deed in lieu has three alternatives after completing the deal:
  
  - vacating the home right away.
• getting in into a three-month shift lease with no lease payment needed, or.
• entering into a twelve-month lease and paying lease at market rate.
  
  To learn more on requirements and how to engage in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you might be eligible for an unique deed in lieu program, which may include relocation help.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a shortage judgment versus a property owner as part of a foreclosure or after that by filing a separate lawsuit. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a shortage judgment versus you after a foreclosure, you may be much better off a foreclosure happen instead of doing a deed in lieu of foreclosure that leaves you liable for a deficiency.
  
  Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or decrease the shortage, you get some cash as part of the transaction, or you get additional time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific guidance about what to do in your particular scenario, speak with a regional foreclosure attorney.
  
  Also, you need to consider the length of time it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will buy loans made two years after a deed in lieu if there are extenuating situations, like divorce, medical costs, or a task layoff that caused you economic trouble, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting duration for a Fannie Mae loan is seven years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, brief sales, and deeds in lieu the exact same, typically making it's mortgage insurance readily available after three years.
  
  When to Seek Counsel
  
  If you require assistance understanding the deed in lieu process or analyzing the documents you'll be needed to sign, you should consider talking to a qualified attorney. An attorney can also assist you negotiate a release of your individual liability or a decreased shortage if required.