DEED IN LIEU OF FORECLOSURE
We help people negotiate a transaction called a “deed in lieu of foreclosure”, or “deed-in-lieu” for short. This is a process wherein the mortgage company accepts from the homeowner the deed to the real estate, instead of having to go through the entire judicial foreclosure process to obtain the deed. The benefit to both parties is fairly straightforward. The mortgage company does not want to incur unnecessary legal expense, and they don’t want their collateral – the house – in the hands of someone that has no interest in preserving it. The homeowner would rather avoid the cost of foreclosure and the resulting negative credit impact of the foreclosure.
Wait, what exactly is foreclosure?
Let’s talk a little background here. Regardless of whether the procedure takes place in or out of court, foreclosure is the selling of the real estate to attempt to pay the debt owed. Foreclosure can only happen if the homeowner is not meeting the contractual obligations of their mortgage.
Why would my mortgage company reject a deed-in-lieu?
There are several reasons why the bank would not be interested in this loss mitigation option. First, the mortgage company does not want a deed that is encumbered by other liens. If there is a second mortgage on the property, then a deed-in-lieu would merely transfer a deed that carries a second mortgage. If the homeowner owes back income taxes to the state or the IRS, there are likely tax liens on the property. Similarly, if creditors have sued the homeowner(s), those creditors may have judgment liens on the real estate. A foreclosure sale will strip all liens off of the property. So, the mortgage company may see foreclosure as a better option, rather than taking a deed subject to other liens.
Also, the mortgage company would decline a deed-in-lieu if the property is in a non-judicial foreclosure state. Non-judicial foreclosures require much less time and expense. By definition, they do not have to go through court, so there is less to spend in legal fees and less time to spend waiting for the court. Remember, the primary benefit of taking the deed without going through the foreclosure, is that the lender saves time and money. A non-judicial foreclosure can take place in 8-10 weeks and is relatively inexpensive.
What if the mortgage company acts like they are working with me on this?
Beware of false hope. Regulations often require the bank to discuss deed-in-lieu with you, even if they have no intention of accepting one. They are similarly going to very painstakingly coordinate the delivery of lots of homeowner documentation, even if they will never actually accept the deed. So, you may feel like you are working with the mortgage company on this one, when in fact you are just wasting a lot of time and energy. Wasting energy is one thing, but wasting time may mean that you are eliminating this opportunity as an option. See below.
Am I in a judicial foreclosure state?
Yes, you are if you live in Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New York, North Dakota, Ohio, Pennsylvania, South Carolina, Vermont, and Wisconsin. New Mexico also uses judicial foreclosures for mortgages recorded pre-2007. Colorado and Maryland have minimal court supervision. In Oklahoma and South Dakota, the homeowner can request a judicial foreclosure. Otherwise, you live in a non-judicial foreclosure state, and your mortgage company is extremely unlikely to entertain accepting a deed in lieu of going through the foreclosure process.
When is it appropriate to try and negotiate a deed-in-lieu?
It can be appropriate at any stage. Practically though, the mortgage company wants to save money. So, if you wait until the very end of an expensive foreclosure process, they will likely elect to continue with the final stages of foreclosure.
Why would hiring a lawyer help?
Homeowners have a very limited audience. Typically, the only ears that hear their pleas belong to entry-level, front-line mortgage company representatives who do not have the authority to make decisions about accepting a deed. Their role in the process is to gather from the homeowner very specific and tedious documentation and information. If all of the documents say what they are supposed to say, and the information is exactly what they need to hear, then they will pass the request on to someone that can make the decision. If that initial mortgage rep does not have every little thing that they need, then the request gets denied before someone else ever sees it.
Attorneys can often access and appeal to a wider range of mortgage company employees, including decision-makers, and they can frequently do this without having to present the documentation. An attorney’s best opportunity to negotiate a deed-in-lieu is at the very beginning of the foreclosure case. In fact, a homeowner would be wise to have their lawyer hired and ready before the court case is ever initiated. Most attorneys would prefer to attempt to negotiate a deed-in-lieu with the mortgage company pre-foreclosure, and then with the mortgage company’s attorney once the foreclosure case is filed. That strategy allows for a couple of opportunities to prevail, before and after the foreclosure case is initiated.
How long does it take to accomplish?
If the homeowner attempts to negotiate a deed-in-lieu, it can take months and months. The timeline for an attorney can vary between days and weeks.
Do I have other options?
Yes! Although this may be your ideal option, there may be other very attractive options that you’ve never considered. You should talk with someone that can help explain all of them to you. If you are making an educated decision about your home and your future, then you should be considering all available options.