Giving up your home to the lender may be the last recourse when facing foreclosure. A deed in lieu of foreclosure involves signing over the deed to your home after other attempts to settle the debt have failed. The lower costs and more predictible outcome may cause a lender to prefer a deed in lieu of foreclosure over a standard foreclosure. In general, you agree to forfeit possession on a certain date in exchange for a more favorable reporting to the credit bureaus.
The lender approves a deed in lieu of foreclosure based on your inability to resume regular repayment in the foreseeable future. Financial hardships are unexpected events that lead to a decrease in income or an increase in financial obligations. Examples of acceptable financial hardships include: job loss or transfer, reduced pay or hours at work, divorce or legal separation, the death, serious illness or disability of a wage earner or a disaster that affects the property or your ability to work. The lender may consider other hardships that you can prove through documentation.
Your lender may require you to apply for a loan modification, or repayment plan, before agreeing to a deed in lieu of foreclosure. It also typically requires that you miss a specified number of payments before giving you the option of a deed in lieu of foreclosure. For example, Fannie Mae and Freddie Mac conventional loans must be at least 90 days delinquent. If your deed in lieu of foreclosure request is approved, the lender may offer you cash for relocation assistance. For a chance at this happening, you must cooperate with all terms of the agreement, including signing and returning documents, moving out by a specified date and leaving the home empty and in good condition.
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Once you have missed mortgage payments, you must act quickly to obtain other options to avoid foreclosure. In general, lenders don't refinance loans with recent missed payments. A loan modification is intended to help borrowers who can resume payments under more favorable terms, such as a stable or lower interest rate. Short sales are for borrowers who cannot afford a loan with better conditions or who must move. In a short sale, the lender agrees to accept less than the balance owed as satisfaction of the debt.
Your lender doesn't have to offer a deed in lieu of foreclosure option if you have missed payments. It may determine that it can recoup more money after foreclosure by selling the home itself and pursuing you personally for losses, known as the deficiency. This is a possibility if your home is located in one of the more than 30 states that allow deficiency judgments, including New York and Florida. Your lender also may pursue a deficiency judgment if the loan wasn't the original loan used to buy the house, but a refinance loan.