If you're going to lose your house to your lender, you may have the choice between letting it take the house through a foreclosure or being proactive and giving the lender the deed in lieu of a foreclosure. Both approaches have advantages and disadvantages. Generally, you should structure a transaction that minimizes the damage to your credit profile. Of course, your ability to structure a graceful exit may be hampered by your lender's unwillingness to work with you.
Both a foreclosure and a deed in lieu of foreclosure carry the potential for damage to your credit. In most cases, you'll have been late on your mortgage leading up to the process, and given the relative size of your mortgage, those 30-, 60- and even 90-day late payments can do real damage to your credit score. However, most distressed homeowners find that structuring a deed in lieu of foreclosure causes less damage to their credit than going through the foreclosure process.
Your Move-Out Date
Depending on your state's laws and your lender's willingness to negotiate, you might get more time in your house with a full foreclosure. Some states have very long foreclosure and redemption periods that can give you up to one year in your home. In addition, your lender may have a backlog of cases and could end up filing for foreclosure late, giving you more time. On the other hand, if you complete a deed in lieu, you will negotiate a move-out date with the bank. While a deed in lieu should get you out of your house sooner, you might be able to negotiate extra time to stay in your house.
Unless you live in a non-recourse state where your lender can't come after you for any money you owe on the mortgage, you still could be liable after foreclosure or deed in lieu. For example, your lender could file for a deficiency judgment or sell the right to sue to a collection agency. If you aren't sure about your state's laws, contact an attorney for professional advice. An attorney also can draft the documents to keep the lender from pursing you after you vacate the property.
Your Lender's Perspective
From your lender's perspective, foreclosures are inconvenient and expensive. When the lender approves a deed in lieu, it gains control of the property faster to preserve its condition. However, foreclosures have one key advantage for lenders; a foreclosure clears many liens off the property title. As such, if you have a second mortgage, you might find that your lender is unwilling to take title to your property with the lien and may require you to go through a full foreclosure.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.