|By David Pilley on August 12, 2011
Deed in lieu of foreclosure is a quick way to get out of a mortgage. A deed in lieu means you’re basically giving the keys of your home to the lender. It’s one step above simply walking away from your mortgage, and some people do it to avoid the stigma of a foreclosure. However, it is not a recommended option, and it could be just as damaging as an actual foreclosure.
A deed in lieu is very simple. You draw up a document with your lender, agreeing that you will hand the mortgage over, and you leave. In order to go this route, there must not be any liens or judgments against your property. You might think about this option if your home has no equity, but most lenders will not accept this option unless you have tried something else, like a loan modification or a short sale. Both sides must enter into the transaction voluntarily, and the settlement must be at least equal to the fair market value of the property.
There may be some advantages on both sides with a deed in lieu, but the advantages are few and far between for both sides. The only real advantage for the (former) mortgage holder is the speed. Once the document is signed, your freedom from the loan is immediate. It will help you avoid foreclosure, and a deed in lieu may be less damaging to your credit score than the “F” word of the credit world.
The reality is your bank or lender does not want you to take this course of action. A deed in lieu might not be profitable to the bank, especially if the property has equity. A bank would rather see a short sale so the onus of finding a new owner will be on the mortgage holder and not the bank. However, a bank or lender might consider a deed in lieu to avoid fees and general paperwork from a foreclosure proceeding.
Remember that the “easiest” option is rarely ever the “best” option. If you draw up a deed in lieu of foreclosure and it gets notarized, where are you now going to stay? Once it becomes a legal document, you must immediately remove yourself from the property, so it’s crucial to know where you’re going if you decide on a deed in lieu. You must also be aware of the hit your credit score will take. You cannot get an FHA-insured mortgage loan until three years after the deed in lieu goes into effect, the same amount of time for an actual foreclosure. Also, if you don’t specify in the deed in lieu to release yourself from liability, the lender may come after you for a deficiency.
There are so few positives from a deed in lieu of foreclosure. Just as bankruptcy is the last resort for credit solution, a deed in lieu should be a last resort to fix your mortgage problems.