What’s A “Deed In Lieu” Of Foreclosure?
There were more than 3.5 million foreclosure notices sent out last year, a total which does not include homes lost with something called a deed in lieu of foreclosure.
What is a “deed in lieu” of foreclosure and is it good or bad?
Good & Bad
In basic terms, a deed in lieu of foreclosure works like this: The borrower has a mortgage which cannot be paid. Rather than get foreclosed, the borrower agrees to simply give back title to the lender. Symbolically the result is “jingle mail” as in the sound keys make when held in an envelope.
Sending in the keys is not enough, however. The lender — and the world — need to get proper paperwork to show that title to the property was transferred. Because of the need for this paperwork (and because the lender wants to avoid the higher costs of a foreclosure) the borrower may actually have some leverage to negotiate a better bailout with the lender.
What’s negotiable with a deed in lieu of foreclosure?
First, the lender wants the property returned in good condition. The alternative in the worst case is a “trash out” where the property is left in ruin and stripped of appliances, pipes and anything else vandals can get.
Second, the lender wants paperwork so that the transfer of title is legal, legit and cheap. A foreclosure can be a huge expense for a lender, perhaps as much as $40,000 to $80,000 per property according to one congressional report.
Third, the lender may actually want the owner to remain in the property to avoid maintenance issues.
Okay, so what about the owner?
Owner Demands
The owner has some leverage and might ask for:
- Time to move so there’s no eviction and household goods are not dumped out on the street. In fact, an owner might actually ask for the opportunity to rent the property.
- A release of all liability so there’s no obligation to repay any debt which remains after the lender sells the house.
- Some sort of better credit mark than one would get with a foreclosure. This is a cosmetic matter because credit is likely to be woeful by the time an owner gets to the point of considering a deed in lieu of foreclosure.
- Cash in the form of a moving allowance. (You can always ask…).
For specific information in your jurisdiction please consult an attorney or legal clinic — this is not a do-it-yourself job and you can bet that the lender has 800 lawyers working on its behalf. Free and low-cost legal services may be available from state bar associations, community housing organizations and local law schools.
When speaking with an attorney be sure to ask about foreclosure, short sales, bankruptcy and a loan modification as alternatives to a deed in lieu of foreclosure.
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