Attorneys aren't mandatory in any legal process, but if they didn't serve a purpose, they'd be out of business. Any time your rights are at stake or you have a lot to lose, it's good to know that someone knowledgeable about the situation has your back. A real estate lawyer probably knows a great deal more about deeds in lieu of foreclosure than you do, and paying one for his expertise can make a difference even after your home is gone.
Deeds in Lieu of Foreclosure
A deed in lieu is something like a voluntary foreclosure. Instead of your lender going through all the time and expense of repossessing your home against your will, you can simply sign over ownership of the property through the creation of a new deed. The end effect is the same – the lender gets possession of the real estate. More than a deed is involved, however. You'd typically enter into a contract or agreement with your lender as well, setting the terms of the transaction. Unless you're well versed in real estate legalese, you'll at least want a lawyer to review the document so you know what you're signing and what rights you're giving your lender after the deed transaction is complete.
Before you have to worry about a deed in lieu agreement and its contents, you've got to convince your lender to accept the deed to your home rather than initiate the foreclosure process. Your lender will take several factors into consideration, such as the value of your home and how much equity you're handing over, and whether you're honestly unable to continue to make your mortgage payments. You must usually submit a letter to your lender, detailing whatever hardship you've encountered that prevents you from making good on your loan. Your lender can refuse to accept a deed in lieu and foreclose instead, so you'll want to make sure your request is presented right. An experienced attorney has done this all before and might know how to entice your lender into agreeing to the deal.
The language included in your deed in lieu contract determines whether your lender can pursue you for any deficiency if it ultimately sells your property for less than what you owe. If your lender doesn't waive this right, or if it asks you to sign a promissory note for a deficiency balance, you could convey your home only to be facing a lawsuit later anyway. The lender might try to get a judgment against you and use it to recoup its loss through seizure of your other assets. This would be a double blow to your credit – both the deed in lieu and the judgment would appear on your credit report. Deeds in lieu typically include a provision that you no longer owe your mortgage balance, but a lawyer can make sure you don't sign anything that doesn't protect you from such an eventuality. He can also help you to determine if you can save your home through some other option, such as the federal Home Affordable Refinance Program or the Home Affordable Modification Program.
Even if you don't use a real estate attorney for your deed in lieu transaction, you might do well to speak to a tax lawyer before you cement the deal with your lender. If your lender agrees not to pursue you for any deficiency balance, it's possible that the Internal Revenue Service could expect you to report the amount as income on your next tax return and pay taxes on it. The federal Mortgage Forgiveness Debt Relief Act can protect you, but this legislation is set to expire at the end of 2013 and you might need a lawyer to figure out whether you qualify.
- The SOS Law Group: Deed in Lieu of Foreclosure
- Law Office of Svetlana Kaplun: Deed-in-Lieu of Foreclosure
- HSH.com: Deed in Lieu – Is it for You?
- Chancellor Title Agency: Deed in Lieu of Foreclosure Agreement (PDF)
- Forbes: Extension of Mortgage Debt Relief and Debt Cancellation – Options if Your Mortgage is Still Underwater
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.