Deed in Lieu of Foreclosure

What is a deed in lieu of foreclosure?

When a person or business defaults on a loan for property, he or she may decide to offer a deed in lieu of foreclosure deal to the lender in order to avoid the legal hassle of foreclosure. The deed in lieu of foreclosure basically turns the property over to the lender in exchange for canceling the loan.

The lender is most likely to accept this exchange if the borrower approaches the lender because the legal requirement is for this to be done willingly and voluntarily, without pressure from the lender. The likelihood of the deed in lieu of foreclosure succeeding is also higher if there are no other liens or encumbrances on the property in question. If it’s a house with a lien for an equity loan attached, the lender is going to be less interested.

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What are the long-term repercussions and effects?

This is a different form of default that stays on an individual’s credit score for seven years, according to this article. Whether a property is foreclosed, sold short, or turned back to the lender in a deed in lieu situation, the borrower’s credit is damaged. The article says that a credit score does not specifically reflect which option was taken but that each is damaging and the effect is clear to lenders in the future. This article says a short sale, which means selling the property for less than what is owed on it and requires the lender’s approval,  is not as damaging to one’s credit score.

Avoiding default and foreclosure

To avoid such a situation, this source suggests that calling a meeting with a representative of your mortgage company before you are in default is the best idea. Alternatives to foreclosure and deed in lieu of foreclosure are possible if you start discussions before missing payments. Some options include renegotiating the terms of the mortgage, seeking a grace period (such as during a spell of bad health) when payments are suspended, and a debt settlement in which the lender may accept less than the full amount owed.

If a collection agency gets involved in your case – or even if Google intercepts your emails — you’re likely to get calls and messages from “loan modification experts” and others seeking to make money off your situation. The Consumer Advocacy organization warns borrowers that anyone offering a “bailout” which is paying off the loan in exchange for the title to the property, or who offers to help modify your loan, is most likely seeking ways to defraud you. Check with your state’s attorney general’s consumer advocate office for help.