A deed in lieu of foreclosure is a drastic compromise with a lender to avoid foreclosure. In some ways, the two are similar. A deed in lieu of foreclosure also requires the homeowner to give up the home to the lender and move out. But a foreclosure is a drawn-out, expensive process that can have a very bad effect on credit. In Ohio, a deed in lieu is a simple process with more flexibility, more savings for the lender, and less of a negative effect on the borrower's credit.
Deed in Lieu Possibility
In Ohio, homeowners have the option to compromise with a deed in lieu by returning the mortgaged property to the lender. Because this property acts as collateral in the contract formed by the two parties, by giving it up, the homeowners are removing all the claims that the lender has against them. Additional options also are possible in Ohio, including a loan modification or loan reinstatement if the borrower is determined to keep the house.
Points of Mediation
Ohio law also allows for mediation on several terms that control the deed in lieu of foreclosure. Homeowners can negotiate on a date of turnover, when the ownership of the house actually passes to the lender. This allows the borrower to plan out renting or other living situations ahead of time and avoid eviction problems. If lenders know the borrower is willing to give up the house, they may be willing to be flexible in these circumstances.
Lenders must still approve the deed in lieu of foreclosure process for the compromise to work. Lender restrictions can be detailed in this process. For instance, lenders that take the property also take any liens or debts associated with the property. Because lenders do not want to deal with or pay these debts, they will usually refuse to use a deed in lieu if there is a second mortgage, an equity line of credit or another liability associated with the property.
Borrowers should keep in mind that lenders in Ohio can arrange deed in lieu contracts in a number of ways. If a lender knows that a home will not make enough money on the market to pay off the mortgage (due to falling housing prices) then the lender may require the deed in lieu agreement to include a section that forces the borrower to pay any remaining debt according to a payment plan, which raises the cost of the compromise considerably.