A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, along with short sales, loan adjustments, payment plans, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner voluntarily 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 many cases, finishing a deed in lieu will launch the borrower from all commitments and liability under the mortgage agreement 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 action in obtaining a deed in lieu is for the customer to request a loss mitigation package from the loan servicer (the company that handles the loan account). The application will need to be filled out and sent together with paperwork about the debtor's income and expenses including:

- proof of income (normally 2 recent pay stubs or, if the debtor is self-employed, an earnings and loss statement).

• current tax returns.
• a financial declaration, detailing month-to-month earnings and costs.
• bank declarations (usually 2 recent statements for all accounts), and.
• a hardship letter or difficulty affidavit.
  
  What Is a Challenge?
  
  A "challenge" is a scenario that is beyond the debtor's control that leads to the borrower no longer having the ability to afford to make mortgage payments. Hardships that receive loss mitigation consideration include, for example, task loss, decreased income, death of a partner, disease, medical expenses, divorce, rate of interest reset, and a natural disaster.
  
  Sometimes, the bank will require the debtor to attempt to offer the home for its reasonable market value before it will consider accepting a deed in lieu. Once the listing duration ends, assuming the residential or commercial property hasn't offered, the servicer will buy a title search.
  
  The bank will generally only accept a deed in lieu of foreclosure on a first mortgage, indicating there should be no extra liens-like second mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the exact same bank holds both the first and the 2nd mortgage on the home. Alternatively, a debtor can select to pay off 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 schedule a brokers rate viewpoint (BPO) to figure out the fair market price of the residential or commercial property.
  
  To finish the deed in lieu, the borrower will be required 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 agreement in between the bank and the debtor and will consist of an arrangement that the borrower acted easily and voluntarily, not under coercion or pressure. This file might also consist of provisions addressing whether the deal remains in full complete satisfaction of the financial obligation 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 typically structured so that the deal satisfies the mortgage financial obligation. So, with a lot of deeds in lieu, the bank can't get a deficiency judgment for the distinction between the home's reasonable market value and the financial obligation.
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  But if the bank wishes to protect its right to seek a shortage judgment, the majority of jurisdictions allow the bank to do so by clearly specifying in the transaction files that a balance stays after the deed in lieu. The bank generally requires to specify the quantity of the deficiency and include this quantity in the deed in lieu files or in a different agreement.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu likewise 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 consideration 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 because the deed in lieu was successfully a nonjudicial foreclosure, the debtor was entitled to security under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is eligible for a deed in lieu has 3 choices after completing the deal:
  
  - vacating the home instantly.
• participating in a three-month shift lease without any rent payment required, or.
• participating in a twelve-month lease and paying rent at market rate.
  
  To find out more on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you might be qualified for a special 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 against a house owner as part of a foreclosure or after that by submitting a separate lawsuit. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a deficiency judgment against you after a foreclosure, you may be better off letting a foreclosure occur instead of doing a deed in lieu of foreclosure that leaves you responsible for a deficiency.
  
  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 cash as part of the transaction, or you receive additional time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For particular suggestions about what to do in your specific scenario, speak with a local foreclosure legal representative.
  
  Also, you must take into factor to consider the length of time it will take to get a new mortgage after a deed in lieu versus a . Fannie Mae, for example, will purchase loans made two years after a deed in lieu if there are extenuating circumstances, like divorce, medical bills, or a job layoff that triggered you financial problem, 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) treats foreclosures, short sales, and deeds in lieu the same, usually making it's mortgage insurance coverage available after three years.
  
  When to Seek Counsel
  
  If you require help understanding the deed in lieu process or translating the files you'll be needed to sign, you should consider speaking with a certified lawyer. A lawyer can also help you negotiate a release of your individual liability or a reduced deficiency if necessary.