A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, in addition to short sales, loan adjustments, repayment plans, and forbearances. Specifically, a deed in lieu is a transaction where the property owner voluntarily moves title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

Most of the times, finishing a deed in lieu will launch the borrower from all obligations and liability under the mortgage agreement 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?
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The initial step in acquiring a deed in lieu is for the borrower to request a loss mitigation bundle from the loan servicer (the business that manages the loan account). The application will require to be completed and sent along with documentation about the customer's income and expenditures including:

- evidence of earnings (typically 2 recent pay stubs or, if the borrower is self-employed, a revenue and loss statement).

• recent tax returns.
• a financial statement, detailing monthly income and expenditures.
• bank statements (generally two recent declarations for all accounts), and.
• a difficulty letter or challenge affidavit.
  
  What Is a Difficulty?
  
  A "hardship" is a scenario that is beyond the debtor's control that results in the borrower no longer having the ability to afford to make mortgage payments. Hardships that receive loss mitigation consideration include, for instance, task loss, minimized earnings, death of a spouse, health problem, medical costs, divorce, rates of interest reset, and a natural disaster.
  
  Sometimes, the bank will require the debtor to try to offer the home for its fair market price before it will consider accepting a deed in lieu. Once the listing period expires, presuming the residential or commercial property hasn't offered, the servicer will purchase a title search.
  
  The bank will usually only accept a deed in lieu of foreclosure on a first mortgage, meaning there should be no additional liens-like second mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic rule is if the exact same bank holds both the first and the second mortgage on the home. Alternatively, a borrower can select to settle any extra liens, such as a tax lien or judgment, to help with the deed in lieu deal. If and when the title is clear, then the servicer will arrange for a brokers cost opinion (BPO) to figure out the reasonable market price of the residential or commercial property.
  
  To finish the deed in lieu, the customer will be required to sign a grant deed in lieu of foreclosure, which is the file that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the terms of the agreement in between the bank and the borrower and will consist of a provision that the borrower acted easily and willingly, not under browbeating or duress. This file might also include provisions dealing with whether the deal is in full fulfillment of the debt or whether the bank deserves to seek a deficiency judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is frequently structured so that the deal satisfies the mortgage financial obligation. So, with many deeds in lieu, the bank can't get a shortage judgment for the difference in between the home's fair market price and the financial obligation.
  
  But if the bank wishes to protect its right to look for a deficiency judgment, many jurisdictions allow the bank to do so by clearly mentioning in the transaction files that a balance remains after the deed in lieu. The bank usually requires to define the quantity of the shortage and include this amount in the deed in lieu files or in a separate contract.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also often depends on state law. Washington, for example, has at least one case that mentions a loan holder may not obtain a shortage judgment after a deed in lieu, even if the factor to consider is less than a full 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 borrower was entitled to protection under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you may be qualified for its Mortgage Release (deed in lieu) program. Under this program, a borrower who is qualified for a deed in lieu has 3 alternatives after completing the deal:
  
  - vacating the home right away.
• entering into a three-month shift lease without any lease payment needed, or.
• participating in a twelve-month lease and paying lease at market rate.
  
  To find out more on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be qualified for an unique deed in lieu program, which might include moving help.
  
  Should You Consider Letting the Foreclosure Happen?
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  In some states, a bank can get a shortage judgment versus a house owner as part of a foreclosure or after that by submitting 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 better off letting a foreclosure take place instead of doing a deed in lieu of foreclosure that leaves you liable for a deficiency.
  
  Generally, it may not deserve doing a deed in lieu of foreclosure unless you can get the bank to agree to forgive or reduce the deficiency, you get some cash as part of the transaction, or you get additional time to stay in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific suggestions about what to do in your specific situation, talk to a regional foreclosure lawyer.
  
  Also, you need to think about the length of time it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for circumstances, will purchase loans made 2 years after a deed in lieu if there are extenuating circumstances, like divorce, medical expenses, or a job layoff that caused you economic problem, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, the waiting period for a loan is 7 years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the same, typically making it's mortgage insurance coverage offered after 3 years.
  
  When to Seek Counsel
  
  If you need aid understanding the deed in lieu procedure or translating the documents you'll be required to sign, you should consider speaking with a qualified attorney. A lawyer can also help you work out a release of your personal liability or a minimized deficiency if required.