Deed In Lieu

Many homeowners who find themselves approaching a foreclosure and approached other options such as a short sale or loan modification with no success often turn to a Deed in Lieu of foreclosure, because it is the fastest way out.

A deed-in-lieu of foreclosure is when you give your home back to your lender, take your losses and keep the bank from sustaining any future losses. A DIL must be completed within 90 days of initiation of the process. The ramifications to your credit score are about the same as the short sale. Many banks will request documentation that you have tried to sell the property in an attempt to pay-off the remainder of the loan, as banks are in the business of money, not real estate. Having properties on their books, means more headaches for them, so they will want to see the homeowner exhausting all the options before handing their keys over.

The Position of the Bank

Banks often will hesitate on taking a deed in lieu, as they then become immediately responsible for the insurance payments, taxes, utilities, asset management, attorney fees and Realtor expenses and fees. An asset management company is hired to secure the property, such as any broken windows, and change the door locks to ensure the property is not an easy target of vandalism. Appraisal companies and realtors are then hired to prepare it for resale. After all the costs the bank has accrued, their only guarantee is a sale at market value, which is what a potential customer is willing to pay for it.

On the positive side, By agreeing to a deed in lieu of foreclosure, the lender will be able to take action right away assuming the title to the property immediately instead of having to wait for months for the foreclosure process to complete. The lender will save considerably on court costs and lawyers’ fees fighting the homeowner through the court battles.

The Position of the Homeowner

The homeowner is simply admitting to the bank they can no longer pay their mortgage and are simply handing over the property back to the bank. A home owner may not prefer signing over their Deed in Lieu if they have equity in the property that can be recovered through a sale. The process is quick and is often the solution most homeowners resort to when all their other options are exhausted. Once the foreclosure process is activated, a homeowners options are limited drastically to negotiate with a lender because payment arrearages, interest and penalties have piled up, making deed in lieu's less accessible.

The quicker the homeowner is released from the mortgage payments, the less the homeowner owes on back payments and penalties for late fees. Some banks forgive the penalties, late fees, and back payments while others peruse the homeowner for the extra fees. In addition, a bank will not consider a deed in lieu of foreclosure if there are any liens on the property. Banks are in the business of money and not acquiring more debt payments. While the process is a fast solution for the homeowner, it allows the bank the opportunity to address the problem immediately, causing an immediate eviction.

If a Deed in Lieu might sound like the perfect solution for the homeowner, which brings me to one last point. The bank can hold the homeowner financially responsible for their losses when they decide to sell it on the market and get less money to cover the balance of the loan. 70% of Foreclosures are currently not listed on the MLS, which was admitted by Realty Trac. Banks are holding on to properties because releasing the true amount of defects could cause a catastrophe with investors, causing a multitude of problems including a plunging stock price.

A bank can seek a deficiency judgment on a homeowner 10 years after the homeowner has long forgotten the property, thinking they have a clean slate upon simply handing back the keys. The bank can collect the remainder of mortgage by filing a deficiency judgment on the homeowner through court. A deficiency judgment does damage your credit, but in any case, avoiding foreclosure is always the best course of action that can be taken.