When a homeowner is struggling to pay a mortgage, a loan modification and a short sale are two popular avenues that can help the borrower avoid foreclosure. If a lender rejects those options, another possible solution is a deed in lieu of foreclosure, which transfers the title for a house from the owner to the mortgage lender in exchange for releasing the borrower from responsibility for the debt. A house does not need to be in foreclosure for a deed in lieu of foreclosure to be an option.
Is a Deed in Lieu of Foreclosure the Right Solution for You and Your Lender?
A deed in lieu of foreclosure allows both the borrower and the lender to avoid the expensive and time-consuming foreclosure process. It also allows the borrower to avoid the potential embarrassment of being evicted.
If you have home equity, selling your house would be a better solution than pursuing a deed in lieu of foreclosure. If you don’t have any equity, a deed in lieu of foreclosure might be your best option. It would not be a good choice, however, if you have a second mortgage since the second lender could seek money from you for a deficiency. If you agree to a deed in lieu of foreclosure, make sure the document clearly releases you from liability to repay your mortgage.
Before you agree to a deed in lieu of foreclosure, make sure you understand the implications. It would appear on your credit report and could be just as damaging to your ability to obtain future credit as a foreclosure would be. You would not be able to purchase another house for several years. In addition, you might owe taxes on the canceled mortgage debt. You should discuss that with your accountant before making a decision.
Lenders are often unwilling to accept a deed in lieu of foreclosure if the homeowner is current on the mortgage. In those circumstances, a lender could make more money by going through the foreclosure process. In addition, any liens that were filed against the property by other creditors would become the responsibility of the lender, unless the agreement stipulated that the lender was not responsible for the liens. Some loan guidelines do not allow a deed in lieu of foreclosure.
Think Carefully Before Choosing a Deed in Lieu of Foreclosure
If you’re unable to pay your mortgage, a deed in lieu of foreclosure could allow you to walk away, but it should only be used as a last resort if other solutions are unavailable and if you’ve accepted that you’ll lose your home one way or another. Before you consider this option, explore other possible solutions.