A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, together with brief sales, loan modifications, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the property owner title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

In many cases, completing a deed in lieu will release the debtor from all responsibilities and liability under the mortgage contract and promissory note.
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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 obtaining a deed in lieu is for the borrower to ask for a loss mitigation package from the loan servicer (the business that handles the loan account). The application will need to be completed and submitted along with documentation about the debtor's earnings and expenditures consisting of:

- proof of earnings (generally two recent pay stubs or, if the borrower is self-employed, a revenue and loss statement).

• recent tax returns.
• a financial declaration, detailing monthly earnings and expenditures.
• bank statements (usually two recent statements for all accounts), and.
• a challenge letter or challenge affidavit.
  
  What Is a Challenge?
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  A "hardship" is a situation that is beyond the debtor's control that leads to the customer no longer being able to pay for to make mortgage payments. Hardships that receive loss mitigation factor to consider include, for example, task loss, decreased income, death of a spouse, illness, medical expenditures, divorce, rates of interest reset, and a natural disaster.
  
  Sometimes, the bank will require the debtor to try to offer the home for its reasonable market price before it will consider accepting a deed in lieu. Once the listing period expires, presuming the residential or commercial property hasn't offered, the servicer will purchase a title search.
  
  The bank will normally just accept a deed in lieu of foreclosure on a first mortgage, indicating there must be no additional liens-like 2nd mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this general rule is if the same bank holds both the very first and the second mortgage on the home. Alternatively, a customer can choose to settle any extra liens, such as a tax lien or judgment, to help with the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers cost opinion (BPO) to figure out the fair market worth of the residential or commercial property.
  
  To finish the deed in lieu, the customer will be needed to sign a grant deed in lieu of foreclosure, which is the document that moves 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 borrower and will include a provision that the debtor acted easily and voluntarily, not under coercion or duress. This file might likewise include provisions attending to whether the transaction is in complete fulfillment of the financial obligation or whether the bank can seek a deficiency judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is often structured so that the transaction satisfies the mortgage debt. So, with a lot of deeds in lieu, the bank can't get a shortage judgment for the difference in between the home's reasonable market price and the debt.
  
  But if the bank desires to protect its right to look for a shortage judgment, the majority of jurisdictions permit the bank to do so by clearly specifying in the transaction files that a balance stays after the deed in lieu. The bank generally requires to define the quantity of the shortage and include this amount in the deed in lieu documents or in a different contract.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu likewise in some cases depends on state law. Washington, for example, has at least one case that states a loan holder might not get a shortage judgment after a deed in lieu, even if the consideration is less than a complete discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that due to the fact that the deed in lieu was successfully a nonjudicial foreclosure, the customer was entitled to defense under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is qualified for a deed in lieu has 3 alternatives after finishing the deal:
  
  - moving out of the home instantly.
• getting in into a three-month shift lease with no rent payment required, or.
• getting in into a twelve-month lease and paying lease at market rate.
  
  For more details on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you might be eligible for an unique deed in lieu program, which may include relocation assistance.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a deficiency judgment versus a homeowner as part of a foreclosure or after that by submitting 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 shortage judgment versus you after a foreclosure, you might be much better off letting a foreclosure happen instead of doing a deed in lieu of foreclosure that leaves you responsible for a shortage.
  
  Generally, it may not be worth doing a deed in lieu of foreclosure unless you can get the bank to accept forgive or minimize the shortage, 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 guidance about what to do in your particular scenario, speak to a local foreclosure lawyer.
  
  Also, you must consider for how long it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will buy loans made two years after a deed in lieu if there are extenuating circumstances, like divorce, medical costs, or a task layoff that caused you financial problem, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting duration for a Fannie Mae loan is 7 years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the exact same, usually making it's mortgage insurance readily available after 3 years.
  
  When to Seek Counsel
  
  If you need aid understanding the deed in lieu process or interpreting the documents you'll be required to sign, you must think about seeking advice from with a certified attorney. An attorney can also help you work out a release of your individual liability or a minimized deficiency if needed.