A deed in lieu of foreclosure is a process in which the homeowner in default transfers all interest in their home to the lender in order to fulfill a loan. In return, the debt is often pardoned and cleared.
Advantages of a Deed in Lieu of Foreclosure
The advantages of a deed in lieu to the borrower includes the acquittal from most, if not all, of the debt acquired through the defaulted loan. The borrower’s credit will be less damaged with a deed in lieu as compared to foreclosure. Avoiding a foreclosure and going through a deed in lieu increases the chances of getting another mortgage loan in the future. Lenders usually prefer to deal with a deed in lieu over a foreclosure because it usually involves a much shorter process of repossession and less cost.
There are a few factors involved when considering a deed in lieu. First of all, both parties must be acting voluntarily. The home should ideally be free of any liens. Any outstanding debt of the borrower should not exceed the current market value of the home. The lender may want proof that the home has been actively on the market in an attempt to be sold.
The Borrower Ultimately Released From Debt
Part of the deed in lieu process involves forms to be filled out by the borrower and given to the lender, along with the deed to the house. The lender will show the borrower’s debt as ‘paid’, which will confirm the borrower’s fulfillment of debt. The lender, in turn, will no longer have the right to request any monies from the borrower. An escrow company receives and records this information, which eventually releases the borrower from any further obligations.
Possible Consequences of Proceeding With A Deed in Lieu
Certain drawbacks may be associated with the deed in lieu process. A deed tax will have to be paid since a deed in lieu involves the transfer of real property. In addition, income tax will also have to be paid on the rescinded debt. The borrower’s credit may also be negatively affected, though not necessarily as badly as it may have been through an actual foreclosure. The lender may report the default to credit bureaus which would ultimately damage a person’s credit rating in some way. All equity in the home that is handed over in a deed of lieu proceeding will be lost to the borrower. Even if the lender makes a profit on the home when sold, the original borrower will not see any of these monetary gains.
Despite the negative side effects of a deed in lieu of foreclosure, the damaging effects of a foreclosure are much greater. The advantages outweigh the disadvantages. It’s a condensed, less expensive, and gentler process for all associated parties.
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