When to Consider a Deed in Lieu of Foreclosure

Sometimes it’s impossible to save your home. If you can no longer make even modified mortgage payments, it’s time to consider transferring your deed to your lender in lieu of foreclosure.

A deed in lieu of foreclosure is a process where the borrower conveys all interest in his property to the lender to satisfy a loan that is in default, putting an end to foreclosure proceedings.

For a lender, the transaction eliminates the need to proceed with a foreclosure which takes time and money. For a borrower, it’s a good way to bail out, especially if the purchase was made at the peak of the market and the home’s value is substantially underwater. The LA Times reports that in Salinas, California the average equity in homes bought in 2006 is -$214,305.  A deed in lieu of foreclosure lets you walk away.

The lender must agree to the transaction, because with it the borrower is not responsible for any mortgage deficiency – the difference between the fair market value of the home and the amount owed on the mortgage. Make sure that your paperwork is reviewed by an attorney or legitimate counselor to insure that you are not stuck with any lingering obligation.

Second mortgages cloud the picture. Many primary lenders won’t accept a deed in lieu if there is a home equity loan with another lender. In some cases, you might be able to convert the second to an unsecured personal loan, at a higher interest rate, prior to requesting the deed in lieu.

The key to getting a deed in lieu of foreclosure is convincing the lender that the process is one of necessity, not convenience. The borrower should make the offer to enter into the transaction so that the lender is not accused of applying pressure simply to save foreclosure costs. The deed in lieu is granted as a result of genuine hardship, not due to a desire to simply rid oneself of an investment that has gone south.

When it comes to the deed in lieu of foreclosure’s effect on a credit score, the picture is not very clear. The transaction is only entered into by borrowers who are behind on their payments. Being late has already lowered a borrower’s score. A deed in lieu of foreclosure is a negative and many experts conclude that is has an impact only slightly worse than a foreclosure itself. In fact many loan applications ask this specific question:  “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?”

Will you ever be able to buy a home again with a deed in lieu on your record? Yes, but expect to pay a much higher interest rate if you purchase during the seven years the negative record stays on your report.

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