There are some circumstances in which a bank will offer a homeowner the option to pursue a deed in lieu of foreclosure rather than a short sale or other foreclosure alternative. In this process, a person hands over the deed to their home to the bank, bypassing the standard foreclosure process.
You may wonder why it’d be beneficial to hand over the deed to your home rather than go through a short sale, especially as there are cases in which the deed in lieu can favor a bank more than a homeowner. If you have equity in the home you can try to sell the home before you consider a deed in lieu, but there are some sellers who have a mortgage that is underwater, which means the amount owed is worth more than the value of the home.
A property does not necessarily have to be in foreclosure for a deed in lieu to begin. The lender does not necessarily need to have filed a default notice, or begun any official foreclosure proceedings in court. However, banks are also not under any obligation to accept deeds in lieu of foreclosure. Situations in which they’d be likely to decline a deed in lieu as an option include:
- The action would not be profitable for the bank;
- There exist tax liens, judgments or junior encumbrances on the property that would stay with the property and become the responsibility of the lender after the transfer of the deed;
- There were unacceptable terms of the deed in lieu, such as the borrower being asked to make financial contributions in exchange for acceptance of the deed in lieu that the borrower rejects;
- Servicing guidelines in existence that prohibit a deed in lieu from being used.
A deed in lieu is not always beneficial
While transferring a property through a deed in lieu and avoiding some of the worst parts of the foreclosure process can be beneficial in some cases, this is not always true. Here are some examples of some of the drawbacks associated with a deed in lieu:
- It affects your credit: A deed in lieu does show up on a credit report, and it is not likely to be much better for your credit score than a full foreclosure, so don’t expect this to be a route to save your credit score.
- It affects your ability to purchase another home: You’re not going to be able to transfer your deed and turn around and buy a new home. It may take at least four years before you’re able to get a mortgage again.
- It doesn’t always release you from liability: You should make sure that any deed in lieu to which you agree releases you from liability for your loan, because this language isn’t always included in such agreements. If you’re still going to be pursued for mortgage money, there’s no point in handing over the deed.
For more information about the benefits and drawbacks of deeds in lieu, contact a skilled real estate attorney at BoltNagi PC in the U.S. Virgin Islands.
A. Jennings Stone is an attorney in the litigation practice group and concentrates his practice in the area of foreclosures at the law firm of BoltNagi PC. BoltNagi PC is a full service business law firm in St. Thomas, U.S. Virgin Islands.