A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, in addition to short sales, loan modifications, payment plans, and forbearances. Specifically, a deed in lieu is a transaction where the house owner voluntarily 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.
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For the most part, completing a deed in lieu will launch the debtor from all obligations and liability under the mortgage contract and promissory note.
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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 step 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 require to be completed and sent in addition to paperwork about the customer's income and costs including:

- evidence of income (typically 2 current pay stubs or, if the borrower is self-employed, an earnings and loss declaration).

• recent income tax return.
• a financial declaration, detailing monthly income and expenses.
• bank statements (normally two recent statements for all accounts), and.
• a hardship letter or difficulty affidavit.
  
  What Is a Difficulty?
  
  A "hardship" is a circumstance that is beyond the debtor's control that results in the borrower no longer having the ability to manage to make mortgage payments. Hardships that get approved for loss mitigation consideration consist of, for example, task loss, decreased earnings, death of a partner, health problem, medical expenses, divorce, interest rate reset, and a natural disaster.
  
  Sometimes, the bank will need the customer to try to sell the home for its reasonable market worth before it will consider accepting a deed in lieu. Once the listing period expires, presuming the residential or commercial property hasn't offered, the servicer will purchase a title search.
  
  The bank will generally just accept a deed in lieu of foreclosure on a first mortgage, meaning there should be no extra liens-like second mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this general guideline is if the exact same bank holds both the very first and the second mortgage on the home. Alternatively, a customer can select to pay off any additional liens, such as a tax lien or judgment, to assist in the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers rate viewpoint (BPO) to identify the fair market value of the residential or commercial property.
  
  To finish the deed in lieu, the customer will be needed to sign a grant deed in lieu of foreclosure, which is the document that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the agreement between the bank and the debtor and will consist of a provision that the borrower acted easily and voluntarily, not under browbeating or pressure. This document may likewise consist of provisions dealing with whether the transaction remains in complete complete satisfaction of the debt or whether the bank has the right to seek a shortage judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is frequently structured so that the deal pleases the mortgage financial obligation. So, with a lot of deeds in lieu, the bank can't get a shortage judgment for the difference in between the home's reasonable market price and the financial obligation.
  
  But if the bank wishes to maintain its right to look for a shortage judgment, a lot of jurisdictions permit the bank to do so by plainly mentioning in the deal files that a balance remains after the deed in lieu. The bank generally requires to specify the amount of the shortage and include this amount in the deed in lieu documents or in a different contract.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu also sometimes depends on state law. Washington, for example, has at least one case that states a loan holder may not get a shortage judgment after a deed in lieu, even if the factor to consider is less than a full discharge of the debt. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was successfully a nonjudicial foreclosure, the borrower was entitled to security under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you may be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is eligible for a deed in lieu has three choices after completing the transaction:
  
  - vacating the home instantly.
• getting in into a three-month transition lease without any lease payment required, or.
• entering into a twelve-month lease and paying lease at market rate.
  
  For more details on requirements and how to in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be eligible for a special deed in lieu program, which may include relocation help.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a deficiency judgment against a house owner as part of a foreclosure or after that by submitting a separate lawsuit. In other states, state law prevents a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a shortage judgment versus you after a foreclosure, you might be much better off letting a foreclosure happen instead of doing a deed in lieu of foreclosure that leaves you liable for a shortage.
  
  Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to concur to forgive or decrease the deficiency, you get some money as part of the deal, 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 advice about what to do in your particular circumstance, talk with a regional foreclosure legal representative.
  
  Also, you ought to think about the length of time it will require to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for circumstances, will buy loans made two years after a deed in lieu if there are extenuating circumstances, like divorce, medical costs, or a task layoff that caused you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting period 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 very same, usually making it's mortgage insurance readily available after 3 years.
  
  When to Seek Counsel
  
  If you require help comprehending the deed in lieu procedure or translating the documents you'll be needed to sign, you should consider seeking advice from a certified lawyer. A lawyer can also assist you negotiate a release of your personal liability or a reduced deficiency if required.