Mortgage lenders decide whether a borrower can acquire a deed in lieu of foreclosure, and knowing the requirements for a deed in lieu can provide an indication as to whether now's the right time to approach your lender. A deed in lieu involves signing over your house to the mortgage lender. You then walk away from the property, thus avoiding a mortgage foreclosure.
A deed in lieu of foreclosure can seem like a logical option if you fear foreclosure due to financial issues. Regrettably, not every homeowner can sign over his house to the mortgage lender. Borrowers eligible for a deed in lieu must meet certain hardship requirements, and lenders set the criteria. For example, some lenders only work with borrowers who've already missed one or more payments. And even if a borrower defaults and nears the foreclosure phase, lenders take other factors into account before making this option available.
Sale the House
According to Bank of America, a deed in lieu of foreclosure becomes an option only after a borrower attempts to sell his home. This involves placing the property on the real estate market with an agent or selling the property himself. Mortgage lenders prefer borrowers to sell the house or at least attempt to find a buyer to take over the property and mortgage loan. But if a borrower doesn't surface within three months, a lender may consider a deed in lieu to prevent mortgage foreclosure.
Qualifying for Help
Once a mortgage lender determines that a property is eligible for a deed in lieu of foreclosure, property owners prepare information to present to their home lenders. Being eligible for a deed in lieu doesn't guarantee an approval. Lenders grant approvals after reviewing a written hardship letter and evaluating a borrower's income, debts and assets. Hardship letters are imperative to the process because this is where borrowers explain their economic hardship or financial circumstances in detail. On average, it can take 90 days to receive a response from mortgage lenders.
A home foreclosure has a huge negative impact on credit scores, and a foreclosure can drop credit scores by several hundred points. A deed in lieu also harms credit scores, but according to Bank of America, the impact is less severe than a mortgage foreclosure. With this said, previous property owners can likely rebuild their credit or recover faster with a deed in lieu.
- Bank of America: Signing Your Home Over to Your Lender
- Bankrate; 2 Ways to Avoid Foreclosure, Both Painful; Steve Bucci; August 2010
- Consumer Financial Protection Bureau. "What Is a Deed-in-Lieu of Foreclosure?" Accessed July 10, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed July 10, 2020.
- Consumer Financial Protection Bureau. "What Is A Short Sale?" Accessed July 10, 2020.
- Southwest Riverside County Association of Realtors. "Risks and Benefits of a Deed in Lieu of Foreclosure." Accessed July 10, 2020.
- Experian. "What Does Deed in Lieu of Foreclosure Mean?" Accessed July 10, 2020.
- Homeownership.org. "Deed-in-Lieu of Foreclosure." Accessed June 26, 2020.
- IRS. "Real Estate Property Foreclosure and Cancellation of Debt Audit Technique Guide," Page 6. Accessed July 10, 2020.
Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.