A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, in addition to short sales, loan adjustments, payment plans, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner willingly moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank concurring not to pursue a foreclosure.

In a lot of cases, finishing a deed in lieu will release the debtor from all obligations and liability under the mortgage contract 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 step in acquiring a deed in lieu is for the borrower to ask for a loss mitigation package from the loan servicer (the business that manages the loan account). The application will require to be completed and sent together with paperwork about the customer's income and expenses including:

- evidence of earnings (normally two recent pay stubs or, if the customer is self-employed, a profit and loss declaration). - current tax returns.

• a financial statement, detailing regular monthly earnings and costs.
• bank statements (typically two recent declarations for all accounts), and.
• a hardship letter or challenge affidavit.
  
  What Is a Hardship?
  
  A "hardship" is a situation that is beyond the borrower's control that leads to the debtor no longer being able to pay for to make mortgage payments. Hardships that receive loss mitigation factor to consider consist of, for instance, job loss, decreased income, death of a spouse, disease, medical expenditures, divorce, rates of interest reset, and a natural catastrophe.
  
  Sometimes, the bank will require the customer to attempt to offer the home for its reasonable market price before it will think about accepting a deed in lieu. Once the listing period expires, presuming the residential or commercial property hasn't sold, the servicer will order a title search.
  
  The bank will usually just accept a deed in lieu of foreclosure on a first mortgage, implying there must 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 very same bank holds both the first and the 2nd mortgage on the home. Alternatively, a borrower can select to pay off any additional liens, such as a tax lien or judgment, to facilitate the deed in lieu deal. If and when the title is clear, then the servicer will schedule a brokers price viewpoint (BPO) to determine the reasonable market worth 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 transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the terms of the contract between the bank and the debtor and will consist of an arrangement that the borrower acted freely and willingly, not under browbeating or duress. This document might also consist of arrangements addressing whether the transaction remains in full complete satisfaction of the debt or whether the bank has the right to look for a shortage judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is often structured so that the transaction pleases the mortgage debt. So, with most deeds in lieu, the bank can't get a shortage judgment for the difference in between the home's fair market worth and the financial obligation.
  
  But if the bank wishes to maintain its right to look for a deficiency judgment, many jurisdictions allow the bank to do so by clearly mentioning in the deal files that a balance stays after the deed in lieu. The bank usually requires to specify the quantity of the shortage and include this quantity in the deed in or in a separate arrangement.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also sometimes depends upon state law. Washington, for example, has at least one case that specifies a loan holder may not obtain a shortage judgment after a deed in lieu, even if the factor to consider is less than a full 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 efficiently a nonjudicial foreclosure, the debtor was entitled to protection under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you may be qualified for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is eligible for a deed in lieu has 3 choices after finishing the transaction:
  
  - vacating the home immediately.
• participating in a three-month transition lease without any rent payment needed, or.
• participating in a twelve-month lease and paying lease at market rate.
  
  For more information on requirements and how to partake in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you might be eligible for a special deed in lieu program, which might include relocation help.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a shortage judgment against a homeowner 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 against you after a foreclosure, you may 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 deserve doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or minimize the shortage, you get some money as part of the deal, or you get extra time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For particular recommendations about what to do in your specific situation, speak with a local foreclosure legal representative.
  
  Also, you ought to think about the length of time it will take to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will buy loans made 2 years after a deed in lieu if there are extenuating situations, like divorce, medical bills, or a job layoff that caused you financial 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, short sales, and deeds in lieu the very same, normally making it's mortgage insurance offered after three years.
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  When to Seek Counsel
  
  If you require assistance understanding the deed in lieu procedure or analyzing the files you'll be needed to sign, you must think about seeking advice from with a certified attorney. An attorney can likewise help you negotiate a release of your individual liability or a lowered deficiency if needed.