Anyone familiar with doing a Deed In Lieu Of Foreclosure - how does this work?

Question

We can no longer make our payments and just want to give the house back. We own another smaller home where we can live. Selling is not an option because we have only owned the home for 9 months and it is now worth less than what we bought it for because of the housing crisis, so we would have to come up with the difference and, well, if we had the money to do that we could make our mortgage payments. Basically we just want to give the house to the mortgage company. Can anyone give me an idea of how this works?

Also, since our loan is more than the current value of the home, can they go after our other house for the difference? The mortgage for that one is with the same company (Chase) but we have not fallen behind on our payments for that house, just the larger one.

Note that we are not interested in trying to keep the big house. Our financial situation has changed dramatically and unexpectedly since purchasing it and there is no way we can make the payments.

Answer 1

I have worked with clients who have given houses back to the bank during other housing crises.  It appeared that "Deed In Lieu of Foreclosure" looked better on a credit report than a foreclosure.

I would imagine that the bank would see this more favorably, since they don't have to go through the legal hassles to get the house back and prepared for sale.  You should pursue this option.

Answer 2

Using a deed in lieu of foreclosure is becoming a more common solution for homeowners to escape the pain of the foreclosure process. They will not be able to save the home using this method, but it can effect a mutually beneficial solution to the problem with the lender. The homeowners will have to give up title to the property, but this may be a better solution than having it forcefully sold out from under them at a county sheriff sale.

A deed in lieu of foreclosure would not directly affect the foreclosure victims' credit very much at all, which is one of the few drawbacks of using this tactic, along with the fact that the house is not saved in the first place. Their credit report will show the mortgage loan's status as being closed but reflecting the use of a "Deed in Lieu." This is only slightly better than if the credit report just said the loan had been closed due to a full "Foreclosure."

However, the deed in lieu can affect the homeowners' credit history indirectly in a number of positive ways. These should not be overlooked, as they can vastly increase their financial footing just after the foreclosure and for years afterwards.

First, by giving the deed in lieu, the homeowners will end the foreclosure process sooner than if the house is allowed to go through the entire court system until it is sold at the foreclosure auction. That means the foreclosure victims' credit reports will show fewer months of late mortgage payments. Instead of nine months of late payments and then a foreclosure, the credit history may reflect six months and then a deed in lieu. Admittedly, this is only a small consolation, but the credit score may stabilize and start to increase easier with even a few less late payments. In other words, the fewer late payments the homeowners show, the easier it will be to recover.

Also, the deed in lieu can help because, by ending the foreclosure earlier, the foreclosure victims will immediately start getting some distance from the whole process. The deed in lieu can make an end of the ordeal months sooner than watching the home be taken away by the legal mechanisms of foreclosure. The further away in time the homeowners can get from the foreclosure, the less it will affect the decisions of other creditors to loan them money in the future, including buying a new home.

For example, a foreclosure that has just ended two months ago will look very bad to a creditor, and will ensure the applicants receive the highest interest rate, if they can get approved for a loan at all. But a foreclosure that is six months ago, or two years ago, will allow the homeowners to get back on track just that much quicker, and qualify for better loans with lower costs of borrowing, if they decide to finance a purchase.

Therefore, if a deed in lieu is the only option that homeowners left to stop foreclosure, it is probably a good idea to offer it to the bank and just try to move on with their lives. Giving up a house voluntarily is never an easy decision, but it can give the foreclosure victims an escape from the entire process and give them the fresh start and opportunity they need to begin the rough road of financial recovery.

Hope that helps a little.

ForeclosureFish

Answer 3

First, you should see of the lender is willing to do a "modification of mortgage."  That would be to lower the interest rate.  The lender will lose money by taking the deed back, so the lender is often willing to accept a lower interest rate.

If you need to do a deed in lieu of foreclosure, then the lender just takes over the property.  You will not be responsible for the shortfall, if the property sells for less than the mortgage payoff.

Best of luck to you!

I am a mortgage broker, and formerly the Recorder of Deeds.

Answer 4

Dear Princess,

                Relax and take a deep breath. You are not a bad person because this happened. It may even be you were the victim of malpractice or fraud by the Mtg. Co. representative.

                 A deed in lieu is a contractual agreement between the borrowers and the lender wherein the borrowers agree to return the property to the lender in satisfaction of any further or additional responsibility.

         Sometimes it is difficult to get started in the process. Many loan companies will try to convince you to accept a modification and keep on trying. This is for their benefit and not YOURS! If you truly cannot afford both properties drop one and try to keep the other. Be firm even pushy.

                 Without a deed in lieu, liability may attach to you in the form of a deficiency judgment depending upon the State you live-in, whether this property was purchased for personal occupancy (not investment property) and the manner the lender forecloses. This type of information should be possessed by  local real estate agents.

Keep in mind that regardless of any credit blemish...you were victims.

Good luck.