What Is the Key in a Lieu of Deed?
Homeownership is often part of the American Dream. Debt and unforeseen circumstances, however, can turn that dream into a nightmare. If the owner can't make the required payments for the property, the lender may initiate foreclosure proceedings. An alternative to foreclosure is the use of deed in lieu of foreclosure. Deeds in lieu of foreclosure offer a potentially faster resolution between the owner and lender and, according to Nolo, look better on the owner's credit report.
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Deed in Lieu of Foreclosure
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A deed in lieu of foreclosure is an alternative to traditional foreclosure proceedings. The owner loses possession and title of the house but transfers title to the lender voluntarily. In return, the lender releases the owner's obligations under the original terms of the financing. Additionally, the lender agrees not to initiate foreclosure proceedings or to cancel any current foreclosure actions.
Key Concerns
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Both the lender and owner must consider a number of key issues before actively pursuing this remedy. For the owner, the key is whether the transaction cancels the outstanding balance on the loan. According to Bills.com, deeds in lieu of foreclosure may vary; the owner should read the contract carefully. For the lender, it's important that the transaction make economic sense. The property may fetch a higher price on the market, so the lender may require the owner to try to sell it first.
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Short Sale
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When discussing foreclosures and deeds in lieu of foreclosure, short sales often enter into the conversation. Like a deed in lieu, a short sale is an alternative to foreclosure. The key difference between a deed in lieu of foreclosure and a short sale is the effect on the ownership of the property. With a deed in lieu of foreclosure, actual ownership transfers to the lender. During a short sale, the owner negotiates potential sales offers and then submits those offers to the lender. The offer is usually not enough to cover the entire loan balance, but accepting a lesser amount is sometimes preferable to pursuing foreclosure proceedings. Ownership never vests in the lender during a short sale --- it remains with the original owner and transfers to the new owner if the lender agrees to the short sale's terms.
Other Issues
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A deed in lieu of foreclosure isn't appropriate in every situation. Factors such as market conditions and the owner's relative financial position affect whether a lender will agree to accept a deed in lieu. According to Nolo, lenders often prefer cash over title to land. Even if the lender accepts the deed in lieu, the owner should consider the ramifications. The owner may have to report the forgiven debt amount as income on his taxes, for example. Because of the legal nature of this transaction, readers should seek independent advice before proceeding.
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