A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) choice, along with short sales, loan modifications, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the house owner voluntarily transfers title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

In many cases, finishing a deed in lieu will launch the borrower from all obligations and liability under the mortgage contract and promissory note.
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How Does a Deed in Lieu of Foreclosure Work?
Deficiency Judgments Following a Deed in Lieu of Foreclosure
Mortgage Release Program Under Fannie Mae
Should You Consider Letting the Foreclosure Happen?
When to Seek Counsel
How Does a Deed in Lieu of Foreclosure Work?

The primary step in getting a deed in lieu is for the borrower to request a loss mitigation bundle from the loan servicer (the business that manages the loan account). The application will need to be filled out and submitted together with documents about the borrower's earnings and expenses including:

- proof of income (generally two recent pay stubs or, if the is self-employed, a profit and loss statement).

• current tax returns.
• a financial declaration, detailing monthly income and costs.
• bank statements (normally 2 current statements for all accounts), and.
• a hardship letter or hardship affidavit.
  
  What Is a Hardship?
  
  A "challenge" is a circumstance that is beyond the borrower's control that leads to the customer no longer having the ability to afford to make mortgage payments. Hardships that receive loss mitigation factor to consider consist of, for example, job loss, minimized earnings, death of a spouse, disease, medical expenses, divorce, rates of interest reset, and a natural disaster.
  
  Sometimes, the bank will require the customer to attempt to offer the home for its fair market price before it will consider accepting a deed in lieu. Once the listing duration ends, presuming the residential or commercial property hasn't offered, the servicer will buy a title search.
  
  The bank will typically just accept a deed in lieu of foreclosure on a very first mortgage, meaning there need to be no extra liens-like 2nd mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this general rule is if the exact same bank holds both the first and the second mortgage on the home. Alternatively, a debtor can choose to pay off any additional liens, such as a tax lien or judgment, to help with the deed in lieu deal. If and when the title is clear, then the servicer will arrange for a brokers price opinion (BPO) to identify the fair market worth of the residential or commercial property.
  
  To complete the deed in lieu, the borrower will be required to sign a grant deed in lieu of foreclosure, which is the file that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the arrangement in between the bank and the borrower and will include a provision that the borrower acted freely and willingly, not under browbeating or pressure. This document may also consist of provisions dealing with whether the deal remains in full satisfaction of the financial obligation or whether the bank can seek a deficiency judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is typically structured so that the transaction satisfies the mortgage financial obligation. So, with most deeds in lieu, the bank can't get a shortage judgment for the distinction between the home's fair market worth and the debt.
  
  But if the bank wishes to protect its right to seek a deficiency judgment, most jurisdictions permit the bank to do so by plainly specifying in the transaction documents that a balance stays after the deed in lieu. The bank typically requires to specify the amount of the deficiency and include this quantity in the deed in lieu documents or in a different agreement.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu also often depends upon state law. Washington, for instance, has at least one case that mentions a loan holder may not acquire a deficiency judgment after a deed in lieu, even if the factor to consider is less than a complete discharge of the debt. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was efficiently a nonjudicial foreclosure, the borrower was entitled to defense under Washington's anti-deficiency laws.
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  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is qualified for a deed in lieu has 3 choices after completing the transaction:
  
  - vacating the home right away.
• participating in a three-month shift lease without any lease payment needed, or.
• participating in a twelve-month lease and paying rent at market rate.
  
  For more details on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you might be qualified for an unique deed in lieu program, which may include relocation assistance.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a shortage judgment versus a homeowner as part of a foreclosure or after that by submitting a different suit. In other states, state law prevents a bank from getting a shortage judgment following a foreclosure. If the bank can't get a shortage judgment against you after a foreclosure, you might be better off letting a foreclosure happen instead of doing a deed in lieu of foreclosure that leaves you accountable for a shortage.
  
  Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to agree to forgive or lower the shortage, you get some cash as part of the transaction, or you get additional time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For particular recommendations about what to do in your particular scenario, talk with a local foreclosure legal representative.
  
  Also, you must consider for how long it will take to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for circumstances, will buy loans made two years after a deed in lieu if there are extenuating scenarios, like divorce, medical expenses, or a task layoff that triggered you financial problem, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting period for a Fannie Mae loan is 7 years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, brief sales, and deeds in lieu the very same, typically making it's mortgage insurance readily available after 3 years.
  
  When to Seek Counsel
  
  If you need assistance understanding the deed in lieu procedure or interpreting the files you'll be needed to sign, you need to consider seeking advice from a certified lawyer. A lawyer can likewise help you work out a release of your personal liability or a lowered deficiency if required.