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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, together with short sales, loan adjustments, payment plans, and forbearances. Specifically, a deed in lieu is a deal where the homeowner voluntarily transfers 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 launch the customer 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 initial step in obtaining a deed in lieu is for the debtor to request a loss mitigation plan from the loan servicer (the business that manages the loan account). The application will need to be filled out and sent in addition to paperwork about the borrower's earnings and expenses consisting of:

- proof of earnings (normally 2 recent pay stubs or, if the borrower is self-employed, a revenue and loss statement).

• current tax returns.
• a financial statement, detailing monthly income and expenditures.
• bank declarations (generally 2 recent declarations for all accounts), and.
• a hardship letter or difficulty affidavit.
  
  What Is a Hardship?
  
  A "hardship" is a situation that is beyond the borrower's control that leads to the customer no longer being able to afford to make mortgage payments. Hardships that qualify for loss mitigation consideration consist of, for example, job loss, decreased income, death of a partner, disease, medical costs, divorce, rates of interest reset, and a natural disaster.
  
  Sometimes, the bank will need the borrower to try to sell the home for its fair market price before it will think about accepting a deed in lieu. Once the listing period ends, presuming the residential or commercial property hasn't offered, the servicer will order a title search.
  
  The bank will normally just accept a deed in lieu of foreclosure on a first mortgage, suggesting there need to be no additional liens-like 2nd mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic rule 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 facilitate the deed in lieu deal. If and when the title is clear, then the servicer will set up for a brokers price opinion (BPO) to determine the reasonable market worth of the residential or commercial property.
  
  To complete the deed in lieu, the debtor 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 terms of the contract between the bank and the customer and will consist of a provision that the borrower acted easily and voluntarily, not under browbeating or duress. This file might also consist of provisions attending to whether the transaction remains in 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 satisfies the mortgage financial obligation. So, with the majority of deeds in lieu, the bank can't get a deficiency judgment for the distinction in between the home's fair market worth and the financial obligation.
  
  But if the bank wishes to preserve its right to seek a deficiency judgment, most jurisdictions allow the bank to do so by clearly mentioning in the deal documents that a balance remains after the deed in lieu. The bank usually requires to specify the amount of the deficiency and include this amount in the deed in lieu files or in a .
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also sometimes depends on state law. Washington, for instance, has at least one case that states a loan holder may not acquire a shortage judgment after a deed in lieu, even if the factor to consider 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 effectively 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 may be qualified for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is eligible for a deed in lieu has three choices after finishing the deal:
  
  - moving out of the home right away.
• getting in into a three-month shift lease without any lease payment required, or.
• getting in into a twelve-month lease and paying lease at market rate.
  
  To learn more on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you might be eligible for an unique deed in lieu program, which might include moving assistance.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a deficiency judgment versus a homeowner as part of a foreclosure or after that by submitting a separate lawsuit. In other states, state law avoids 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 better off letting a foreclosure take place instead of doing a deed in lieu of foreclosure that leaves you liable for a shortage.
  
  Generally, it may not deserve 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 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 advice about what to do in your particular scenario, talk to a regional foreclosure attorney.
  
  Also, you should take into account 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 2 years after a deed in lieu if there are extenuating scenarios, like divorce, medical expenses, or a task layoff that triggered you economic trouble, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, 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) deals with foreclosures, brief sales, and deeds in lieu the very same, typically making it's mortgage insurance available after 3 years.
  
  When to Seek Counsel
  
  If you need help understanding the deed in lieu procedure or interpreting the documents you'll be needed to sign, you should consider consulting with a qualified lawyer. A lawyer can likewise help you negotiate a release of your individual liability or a reduced deficiency if required.