The Advantages of Deed in Lieu of Foreclosure
A deed in lieu is worth considering if you need to sell your property quickly to avoid mortgage foreclosure. Lenders decide whether a borrower meets the guidelines for a deed in lieu, which may include proving financial hardship. While a deed in lieu can have negative consequences, such as putting you in a position where you must pay taxes on the forgiven balance, this provision also has certain benefits.
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Definition
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Property owners can work out an agreement with their mortgage company to walk away from the mortgage obligation. Lenders don't routinely take possession of properties. But if a borrower can't fulfill the mortgage agreement, and there's a strong risk of foreclosure, a lender may cancel the mortgage loan and take ownership of the home. Signing over the home loan deed eradicates any financial liability on the borrower's end.
Avoid Mortgage Foreclosure
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One of the biggest advantages to a deed in lieu of foreclosure is avoiding a mortgage foreclosure, in which the lender claims a property due to non-payment of the mortgage, then evicts the borrowers from the property. Outcomes from a property foreclosure include a damaged credit report for at least seven years, the inability to purchase another home in the immediate future and the reporting of the foreclosure in local publications. While a deed in lieu has comparable results, borrowers typically initiate this process, and the credit damage is not as grave as a mortgage foreclosure, according to Fannie Mae.
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Reduced Responsibility
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If permitted to do a deed in lieu by your mortgage lender, you're not responsible for the sale of the property. Once the lender takes control of the property, the mortgage company will handle the business of finding a new owner for the property. You're able to vacate the property, move into another house or apartment and not concern yourself with the sale process.
Deed for Lease Option
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After completion of the property transfer, some mortgage lenders give borrowers the option of living in the home as renters. Called a deed for lease, this alternative can help borrowers who want to keep the house after a deed in lieu but who can't afford the mortgage payment. Mortgage companies that approve a deed for lease sometimes discount the monthly payment to keep the financial liability within the new tenant's reach.
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