An alternative to foreclosure that can benefit both Homeowners and Lenders
Due to tough economic times, an increasing number of property owners are facing a mortgage foreclosure. An option in some cases is to offer the lender a deed in lieu of foreclosure instead of a short sale or foreclosure, but what is a deed in lieu of foreclosure and how does it work?
WHAT IS A DEED IN LIEU OF FORECLOSURE?
A deed in lieu of foreclosure is a process in which the borrower voluntarily transfers all interest in real property to the lender to satisfy a loan obligation in order to avoid foreclosure proceedings.
DEED IN LIEU OF FORCLOSURE AND THE LENDER
From the lender's perspective, there are several advantages of accepting a deed in lieu of foreclosure.
- Legal fees and processing time are reduced compared to traditional foreclosure.
- Faster disposition reducing the risk of property devaluation and allowing the sale of the property sooner.
- If the property is under construction and financed by a construction loan, a deed in lieu of foreclosure can prevent the delay of work.
Alternately, disadvantages to the lender in a deed in lieu of foreclosure, compared to a traditional foreclosure, are evident with the retaining of junior liens, unlike in traditional foreclosure. Therefore, the borrower may not have the legal right to hand over the property. The lender has to decide if it is advantageous to pay the junior lien before entering into the deed in lieu of foreclosure process. In addition, the borrower could later take action to set the conveyance aside. Lastly, other creditors of the borrower could question the legality of the conveyance, which could jeopardize the ability for the lender to process any claims against the borrower.
DEED IN LIEU OF FORECLOSURE AND THE BORROWER
As for the borrower, by volunteering a deed in lieu of foreclosure, they can...
- Protect their credit from further damage.
- Avoid a deficiency judgment.
- Prevent the recording of a notice of default against their name if they offer the deed in lieu of foreclosure as soon as possible.
A major disadvantage to the borrower is that they will not be able to receive any profits from the sale of the property by the trustee.
A deed in lieu is a better choice for homeowners who have a minimal amount of equity in their property.
IMPORTANT THINGS TO REMEMBER ABOUT A DEED IN LEIU OF FORECLOSURE
Voluntarily offering a deed in lieu of foreclosure to a lender does not necessarily cancel the note and deed of trust. Both parties should sign a written agreement that clearly outlines the status of the debt and if the borrower still needs to pay the lender additional fees.
- It is also important to note that the lender cannot have a deed in lieu of foreclosure held by escrow during the transfer of a loan in the case of judicial foreclosure when a borrower defaults.
- It is in violation of the law if a deed is lieu is mandatory when preparing the mortgage loan because it denies the borrower's rights of redemption. The borrower must voluntarily submit the deed in lieu to the lender and the lender cannot force the borrower into such a transaction.
- The borrower must not file a deed in lieu of foreclosure without the lender's knowledge, because it will not release them from the responsibility of the note and deed of trust. The use of a deed to transfer title is unacceptable unless the lender approves it. The lender can reject the transfer of title by recording a notice of non-acceptance in such circumstances.
Homeowners facing foreclosure, who have little equity in their homes, may find that a Deed In Lieu Of Foreclosure is an acceptable alternative that works to protect their credit rating from further damage. Lenders may find a Deed In Lieu of Foreclosure an acceptable alternative to foreclosure proceeding saving them valuable time and money in court costs and fees.
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