A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, along with short sales, loan adjustments, repayment plans, and forbearances. Specifically, a deed in lieu is a deal where the property owner willingly 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.
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In most cases, finishing a deed in lieu will launch the debtor from all commitments 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 primary step in obtaining a deed in lieu is for the borrower to ask for a loss mitigation plan from the loan servicer (the business that handles the loan account). The application will require to be filled out and submitted together with paperwork about the customer's earnings and expenditures including:

- evidence of earnings (usually two current pay stubs or, if the customer is self-employed, an earnings and loss statement).

• recent income tax return.
• a financial statement, detailing month-to-month earnings and expenses.
• bank statements (typically 2 current statements for all accounts), and.
• a difficulty letter or challenge affidavit.
  
  What Is a Difficulty?
  
  A "difficulty" is a scenario that is beyond the debtor's control that leads to the debtor no longer having the ability to pay for to make mortgage payments. Hardships that get approved for loss mitigation consideration include, for example, job loss, reduced income, death of a spouse, health problem, medical costs, divorce, rates of interest reset, and a natural disaster.
  
  Sometimes, the bank will need the borrower to try to offer the home for its fair market value before it will think about accepting a deed in lieu. Once the listing duration ends, presuming the residential or commercial property hasn't sold, the servicer will order a title search.
  
  The bank will normally just accept a deed in lieu of foreclosure on a first mortgage, meaning there should be no extra liens-like second mortgages, judgments from financial institutions, or tax liens-on the residential or commercial property. An exception to this basic rule is if the exact same bank holds both the very first and the second mortgage on the home. Alternatively, a customer can select 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 set up for a brokers cost opinion (BPO) to identify the reasonable market value of the residential or commercial property.
  
  To finish the deed in lieu, the debtor will be required 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 regards to the agreement in between the bank and the borrower and will include a provision that the customer acted easily and voluntarily, not under coercion or duress. This document may likewise consist of provisions attending to whether the transaction remains in full satisfaction of the debt or whether the bank deserves to seek a shortage judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is frequently structured so that the deal pleases the mortgage financial obligation. So, with the majority of deeds in lieu, the bank can't get a deficiency judgment for the distinction between the home's fair market price and the debt.
  
  But if the bank wants to protect its right to seek a shortage judgment, a lot of jurisdictions allow the bank to do so by clearly mentioning in the deal documents that a balance remains after the deed in lieu. The bank normally needs to specify the amount of the deficiency and include this quantity in the deed in lieu documents or in a separate contract.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also sometimes depends on state law. Washington, for instance, has at least one case that states a loan holder may not obtain a shortage judgment after a deed in lieu, even if the consideration is less than a complete discharge of the debt. (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 efficiently 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 might be qualified for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is qualified for a deed in lieu has three alternatives after finishing the deal:
  
  - moving out of the home instantly.
• getting in into a three-month shift lease with no rent payment needed, 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 might include relocation help.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a shortage judgment against a homeowner as part of a foreclosure or after that by filing a different claim. In other states, state law prevents a bank from getting a deficiency 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 take place instead of doing a deed in lieu of that leaves you liable for a deficiency.
  
  Generally, it might not deserve doing a deed in lieu of foreclosure unless you can get the bank to consent to forgive or reduce the shortage, you get some cash as part of the deal, or you get extra 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 particular scenario, talk to a regional foreclosure lawyer.
  
  Also, you need to take into account for how long it will require to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will purchase loans made 2 years after a deed in lieu if there are extenuating scenarios, like divorce, medical bills, or a task layoff that triggered you financial trouble, compared to a three-year wait after a foreclosure. (Without extenuating situations, the waiting period for a Fannie Mae loan is 7 years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, brief sales, and deeds in lieu the very same, usually making it's mortgage insurance coverage offered after 3 years.
  
  When to Seek Counsel
  
  If you require aid understanding the deed in lieu procedure or analyzing the documents you'll be required to sign, you must consider seeking advice from with a certified lawyer. A lawyer can also help you work out a release of your personal liability or a lowered shortage if required.