If you're facing foreclosure, you do have options. You can attempt a deed in lieu of foreclosure, in which you voluntarily give ownership of your home over to your lender. This still stings your credit report -- Fair Isaac estimates that a deed in lieu of foreclosure can ding your credit score anywhere from 85 points to 160 points -- but at least you can avoid the embarrassment and hassle of being forcefully evicted from your home. You can start the deed in lieu of process by writing a letter explaining why you can no longer afford your mortgage payments. What happens next depends on your mortgage lender.
An important step of the deed in lieu of foreclosure process is the hardship letter. In this letter, you spell out exactly why you can no longer afford your monthly home-loan payments. Maybe you've lost your job. Perhaps your spouse has lost a job or a serious illness has left you with sky-high medical bills. Whatever the reason for your financial crisis, list it in this letter. Also include copies of recent paycheck stubs, medical bills, tax-return statements, credit-card bills or any other documents that can support your claim of financial hardship. Send both these copies and your letter to your lender.
Your lender may also require you to fill out a deed in lieu of foreclosure form. This form usually asks for basic information about your home, your mortgage loan, your income and your debts. You can often download such forms directly from your lender's website. Many lenders consider this the official step to the deed in lieu of process.
After your lender receives your hardship letter and completed deed in lieu of application, it will study your finances to determine if you truly can't afford your monthly mortgage payments. It will also calculate whether it will lose less money by foreclosing on you or by voluntarily accepting your home. Your lender is not required to accept your offer of a deed in lieu. It will usually do so if it is in its best financial interests.
If your lender does accept your offer of a deed in lieu of foreclosure, it will take title to your home and attempt to sell it. If it sells your former home for less than what you owe on your mortgage loan, your lender will take a loss. Some lenders will simply write off this loss. Others will require you to make up the difference. If your lender sells your home for $200,000 and you owe $210,000 on your mortgage, your lender could require you to come up with $10,000. Make sure you understand your financial responsibilities before signing a deed in lieu arrangement with your lender.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.