When a homeowner is facing foreclosure, they should speak to a foreclosure defense attorney who can explain the options available to them. One of those options may be a deed-in-lieu of foreclosure, one of the most misunderstood alternatives to foreclosure. Before agreeing to a deed-in-lieu of foreclosure, it’s important homeowners understand what they are getting into. These agreements typically favor a bank and homeowners must understand if it’s really a good option for them.
What Is a Deed-in-Lieu of Foreclosure?
A deed-in-lieu of foreclosure is a document that transfers the title of the home from the homeowner to the bank that holds the mortgage. This document is signed by the homeowner, as well as a notary public. Eventually, the deed-in-lieu of foreclosure is recorded into public records.
Homeowners cannot simply sign the document and give it to the bank. They must first ask the lender for a deed-in-lieu of foreclosure and, only if the bank accepts, can homeowners proceed. Banks are under no obligation to agree and, sometimes, they may reject the request.
Reasons for Rejecting a Deed-in-Lieu of Foreclosure
Many people mistakenly believe that to request a deed-in-lieu of foreclosure, their home must actually be in foreclosure. It’s true that even if a lender has begun judicial proceedings to start the foreclosure process, the bank may still consider a deed-in-lieu of foreclosure. However, even homeowners that are current on their mortgage payments can sometimes request a deed-in-lieu. Banks sometimes still agree to these requests, although it is less often than in cases that involve foreclosure.
A bank will reject a request for a deed-in-lieu of foreclosure if it is not profitable for them. For example, if there is equity in the home, the bank will likely make more profit through a short sale. Or, if the federal government has provided financial incentives to the bank to foreclose, the lender will also likely reject the request for a deed-in-lieu.
When there are junior encumbrances, judgments, or tax liens against the home, banks will also likely deny a request for a deed-in-lieu. This is due to the fact that those liens are attached to the property. As such, if the lender takes the deed to the home, they are also taking on those debts. In these cases, unless the first loan on the home is current and the property is worth more than the total of its encumbrances, the bank will likely deny a request for a deed-in-lieu of foreclosure.
Many mortgages are serviced through a Pooling and Servicing Agreement (PSA). These agreements bundle mortgage loans into mortgage-based securities and sell them to investors. When a home loan has been serviced through a PSA, they are often not eligible for a deed-in-lieu of foreclosure. This is because their guidelines prohibit them. Additionally, the PSA may request that the borrower makes a payment in exchange for accepting a deed-in-lieu. In these cases, borrowers are often uncomfortable making that payment, or they simply don’t have the funds to do so.
Considerations Before Agreeing to a Deed-in-Lieu of Foreclosure
A deed-in-lieu of foreclosure can bring borrowers peace of mind knowing that their ordeal is almost over. However, there are many considerations to think about before agreeing to one. Deeds-in-lieu of foreclosure do have some drawbacks, and it’s important homeowners are aware of them.
One drawback is that it will affect the homeowner’s credit score. A deed-in-lieu of foreclosure will be reported to credit bureaus and show up on a credit report. The extent to which it will impact it will depend on the situation.
After a deed-in-lieu of foreclosure, homeowners are unable to purchase another home right away. If there are extenuating circumstances, homeowners can sometimes purchase another home within two years of a deed-in-lieu of foreclosure. In most cases, though, they must wait at least four years before purchasing another home.
The time a person must wait to buy another home is a big consideration with a deed-in-lieu of foreclosure. For example, if the only other option for the homeowner was to foreclose, they must wait seven years after the foreclosure to purchase another home. However, after a short sale, there is only a two-year waiting period. All alternatives to foreclosure and the impact they have on purchasing a new home should be considered before signing a deed-in-lieu.
Homeowners that do sign a deed-in-lieu of foreclosure must also ensure the agreement releases them from liability to repay the loan. If this provision isn’t included, the lender can still have a deficiency judgment issued against them, which means the borrower still has to repay the loan.
Lastly, the IRS considers any forgiven debt to be taxable income. When lenders forgive a significant amount of debt left on the mortgage, that could have real consequences for homeowners at tax time. It’s important to speak to a foreclosure defense attorney who can help determine the exact consequences, and whether a deed-in-lieu of foreclosure is worthwhile for a borrower.
Think a Deed-in-Lieu of Foreclosure is Right for You? Contact a Florida Foreclosure Defense Attorney
A deed-in-lieu of foreclosure may sound attractive to homeowners that are behind on their mortgage and don’t know how to repay the debt. However, they are not always the right solution. A Fort Lauderdale foreclosure defense attorney can help borrowers understand all the alternatives to foreclosure and assist with choosing one that is right for their situation.
If you’re behind on your mortgage payments or the bank has already begun foreclosure proceedings, contact our attorneys at Loan Lawyers today. We are committed to helping those facing foreclosure find viable options that can get them out of debt sooner, and may even help them keep their home. Call us today at (954) 523-HELP (4357) or contact us online for your free consultation.
Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation to see how we may be able to help you.