A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, along with short sales, loan adjustments, repayment plans, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner voluntarily transfers title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank concurring not to pursue a foreclosure.

For the most part, finishing a deed in lieu will launch the customer from all responsibilities and liability under the mortgage contract and promissory note.

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 initial step in acquiring a deed in lieu is for the borrower to ask for a loss mitigation plan from the loan servicer (the company that handles the loan account). The application will need to be submitted and submitted together with documentation about the debtor's income and expenses consisting of:
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- proof of income (typically 2 recent pay stubs or, if the debtor is self-employed, a profit and loss statement).

• current income tax return.
• a financial statement, detailing monthly earnings and costs.
• bank statements (normally 2 recent statements for all accounts), and.
• a difficulty letter or challenge affidavit.
  
  What Is a Challenge?
  
  A "challenge" is a circumstance that is beyond the customer's control that results in the debtor no longer being able to manage to make mortgage payments. Hardships that receive loss mitigation consideration include, for instance, job loss, decreased earnings, death of a spouse, health problem, medical expenses, divorce, rate of interest reset, and a natural disaster.
  
  Sometimes, the bank will need the borrower to attempt to offer the home for its fair market value before it will think about accepting a deed in lieu. Once the listing duration expires, assuming the residential or commercial property hasn't offered, the servicer will buy a title search.
  
  The bank will usually just accept a deed in lieu of foreclosure on a first mortgage, meaning there need to be no extra liens-like second mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this general guideline is if the very same bank holds both the very first and the second mortgage on the home. Alternatively, a debtor can select to pay off any additional liens, such as a tax lien or judgment, to assist in the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers price opinion (BPO) to identify the fair market value of the residential or commercial property.
  
  To finish the deed in lieu, the debtor will be needed 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 terms of the contract in between the bank and the customer and will include an arrangement that the customer acted freely and willingly, not under browbeating or pressure. This document might likewise include arrangements attending to whether the transaction is in full satisfaction of the financial obligation or whether the bank deserves to seek a shortage judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is often structured so that the transaction satisfies the mortgage financial obligation. So, with a lot of deeds in lieu, the bank can't get a deficiency judgment for the difference between the home's reasonable market price and the debt.
  
  But if the bank wishes to preserve its right to seek a shortage judgment, a lot of jurisdictions allow the bank to do so by plainly mentioning in the deal files that a balance remains after the deed in lieu. The bank normally requires to specify the quantity of the shortage and include this quantity in the deed in lieu files or in a separate agreement.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu likewise sometimes depends on state law. Washington, for instance, has at least one case that mentions a loan holder may not acquire a shortage judgment after a deed in lieu, even if the factor to consider is less than a full 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 effectively a nonjudicial foreclosure, the debtor was entitled to security under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you may be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is eligible for a deed in lieu has three choices after completing the deal:
  
  - vacating the home instantly.
• participating in a three-month shift lease with no lease payment required, or.
• entering into 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.
  treasury.gov
  Similarly, if Freddie Mac owns your loan, you may be eligible for an unique deed in lieu program, which might include moving support.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a deficiency judgment against a homeowner as part of a foreclosure or after that by filing a different suit. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a deficiency judgment versus you after a foreclosure, you might be better off letting a foreclosure occur instead of doing a deed in lieu of foreclosure that leaves you responsible for a shortage.
  
  Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or minimize the deficiency, you get some cash as part of the deal, or you receive 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 advice about what to do in your specific situation, talk with a local foreclosure attorney.
  
  Also, you need to think about how long it will take to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will purchase loans made two years after a deed in lieu if there are extenuating scenarios, like divorce, medical bills, or a task layoff that caused you financial problem, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, the waiting period for a Fannie Mae loan is seven years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, short sales, and deeds in lieu the very same, generally making it's mortgage insurance coverage available after 3 years.
  
  When to Seek Counsel
  
  If you need assistance comprehending the deed in or analyzing the documents you'll be required to sign, you need to consider seeking advice from a qualified lawyer. A lawyer can also help you work out a release of your personal liability or a decreased deficiency if necessary.