A Deed in Lieu of Foreclosure is a means by which a borrower can save their home from being foreclosed on. The document is a deed instrument in which the borrower conveys their interest in a real property to the lender as satisfaction of a defaulted loan. In essence, what this does is release the borrower from the financial indebtedness that is associated with the loan that has gone into default.
Having a deed in lieu of foreclosure will not effect a borrowers credit as much as a normal foreclosure, and it will also save them the public embarrassment that a normal foreclosure can bring. This will also result in advantages for the lender as well, as they will not have to spend the fees associated with a lengthy foreclosure process, and it will also give them more protection should the borrower file for bankruptcy. When going through the foreclosure process and having to evict the tenants there is also the possibility that they could damage the property feeling they were wrongly kicked out of their home. With a deed in lieu this is much less likely to happen because the lender will on occasion allow the people to stay in the home per an arrangement they would make upon receiving the deed in lieu of foreclosure. Even in the case of the lender selling the home, the borrowers usually will not have a problem leaving as they will no longer have any responsibility to pay the loan back.
This is a good faith, voluntary transaction in which the real estate being transferred is the security for the debt. The total consideration given to the borrower will be equal to the fair market value of the property. Normally the indebtedness of the borrower will have to be less than the value of the property, but lenders will consider this remedy to foreclosure even if the value is somewhat less than what is owed at times to save on normal foreclosure costs since the property will now be theirs anyway.
Normally, a lender will not enter into such an agreement without a written request from the borrower. This is to protect themselves from future claims that the transaction was not a voluntary decision which will prevent the borrowers from claiming they were coerced into doing it by the lender. Once this request is received the two sides will be able to work on a settlement agreement. There is no obligation by either party until the final agreement has been reached.
Once an agreement is reached the borrower will receive a copy of their mortgage note stamped “paid” along with an agreement from the lender that they will not be responsible for any balance remaining after the home has been sold. It is possible that the lender could request the borrower to put their home on the market for a period of time prior to accepting a deed in lieu of foreclosure.
A deed in lieu of foreclosure could be a better solution for people who can not pay back their debt rather than going through an entire foreclosure process. There will be less stress from worrying about when the home is going to be auctioned, as well as the fact that they can be relieved of all responsibility to have to pay the loan back. A deed in lieu of foreclosure can provide a much better situation for both the lender and the borrower than any normal foreclosure.
