Deed in Lieu of Foreclosure
What is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a deed mechanism by which a borrower (individual who holds a mortgage) conveys all said interest in the real property to the mortgage holder (lender) to satisfy a loan agreement that is currently in default, thus effectively avoiding foreclosure.
A deed in lieu of foreclosure, in essence, is a disposition option where a mortgagor (individual who holds a mortgage) voluntarily offers collateral (property) in exchange for the release from the obligations latent in the mortgage agreement. A deed in lieu of foreclosure will not be accepted from mortgagors who are deemed willing and able to meet their mortgage payments.
Advantages of a Deed in Lieu of Foreclosure:
A deed in lieu of foreclosures offers a number of advantages to both the lender and borrower. The primary advantage of a deed in lieu of foreclosure for the borrower is that the deed instrument immediately releases the owner from most or all of the indebtedness associated with the defaulted mortgage. Furthermore, the mortgage holder also avoids the public notoriety of a foreclosure. Because the title of a foreclosure is never attached to the individual’s credit profile, he or she may receive more favorable terms for future loans or mortgages. Another benefit to the deed in lieu of foreclosure is that the process damages the mortgage holder’s cred rating less than a foreclosure would.
A deed in lieu of benefits the lender because it reduces the time and cost of a repossession. Furthermore, a deed in lieu of mitigates the risk associated with borrower revenge.
Qualifying for a Deed in Lieu of Foreclosure:
In order to qualify for a deed in lieu of foreclosure, the attached debt must be secured by the property/home being transferred. Both the lender and the homeowner must enter into the agreement in good faith and voluntarily.
This settlement agreement mandates the inclusion of total consideration, which requires an offer at least equal to the fair market value of the home and attached property being conveyed. In some cases, the lender will not agree to a deed in lieu of foreclosure if the outstanding debts exceed the current fair market value of the home and property.
Because the agreement must be voluntarily, a lender will often refuse the deed in lieu of foreclosure if they do not receive a written offer of conveyance from the mortgage holder that states the offer is voluntary in principle. This requirement enacts the parole evidence rule and effectively protects the lender from a prospective subsequent claim that the mortgage lender acted in bad faith or pressured the holder into the settlement. Neither the lender nor the borrower is obliged to proceed with a deed in lieu of foreclosure until an affirmed agreement is reached.