If you’re facing foreclosure and you just want closure, call your lender and tell them you want a deed in lieu of foreclosure agreement. If you and your lender come to terms, your mortgage loan is canceled in exchange for the deed to your house, making the lender the new owner. And it can happen in a fraction of the time that it takes to do a short sale.
The deed in lieu of foreclosure: The government smoothes the way
Thank your government, or more specifically, the Home Affordable Foreclosure Alternatives Program (HAFA), for making this foreclosure alternative more enticing. The program is part of the larger Making Home Affordable program. The HAFA program is for homeowners who can’t keep their homes with the help of a loan modification.
The deed in lieu of foreclosure is one of three foreclosure alternatives that the government encourages lenders and borrowers to pursue. The incentive? Money. In this case you, the borrower, could get as much as $3,000. These relocation funds are part of the incentives of HAFA, but not necessarily for other short sale or deed in lieu programs of the lenders.
Advantages of deeds in lieu of foreclosure
- That $3,000 just mentioned. If you successfully complete a deed in lieu of foreclosure, you could get up to $3,000 from the lender to help you with your relocation expenses.
- You’ll be in a better situation to qualify to buy another home in the future. New Fannie Mae guidelines state that homeowners may qualify for new mortgages in as little as two years after a deed in lieu of foreclosure, as opposed to three years or more after a foreclosure.
- Legal procedures for deeds in lieu are less involved than those with foreclosures. You can move on with your life fairly quickly, points out real estate attorney Lance Churchill. With a deed in lieu, you’ll probably vacate within 30 to 60 days after coming to terms with your lender, as opposed to the four to 12 months the short sale will likely take.
Disadvantages of deeds in lieu of foreclosure
- You may owe additional taxes. If your house is worth just $90,000 but you owe $100,000, by agreeing to a deed in lieu of foreclosure, your lender is essentially forgiving the $10,000 difference. To the IRS, that $10,000 is income, which means it can tax you on it. Don’t lose heart, though. You might qualify for an exception because of the Mortgage Debt Forgiveness Relief Act of 2007. (Note that full relief is available only if the amount of forgiven debt does not exceed the debt that was used to acquire, construct, or rehabilitate a principal residence.) Definitely consult a tax adviser for your particular situation.
- Here’s another possible problem with that $10,000: your lender may not forgive it and still try to collect that difference from you in states where this is allowed. You’ll need to watch carefully for this. Check the deed in lieu of foreclosure agreement and check local regulations since they vary on this issue. Consult an attorney for your particular situation.
- If there is another lien on your home, you probably won’t qualify for a deed in lieu of foreclosure. Lenders shy away from those situations.
- It will affect your credit score just as badly as a foreclosure will.
How to get a deed in lieu of foreclosure
- You need to make a good-faith effort to sell your home before seeking a deed in lieu, says Harlan D. Platt, economist and professor of finance at Northeastern University in Boston. Government guidelines require this, and lenders usually want you to try a short sale first.
- You need to be at least 31 days in arrears before attempting to craft a deed in lieu of foreclosure agreement, according to HUD guidelines. Exact terms vary from lender to lender.
- As mentioned above, you mustn’t have any other liens on your home.
- Your lender must participate in the foreclosure alternatives program. Check with Making Home Affordable, which has a list of participating lenders. If your lender isn’t on that list, don’t give up. Some lenders have their own programs, such as Citibank and Bank of America.
- You’ll need to prove financial hardship. Document with income verification any change in income due to job loss, death, illness, or other life event. There’ll likely be various forms to fill out. Your lender may have somewhat different procedures.
- You need to complete the deed in lieu or have foreclosure initiated within six months of the date of default, according to the Home Affordable Foreclosure Alternatives program.
- Be proactive! Even lenders that are open to a deed in lieu of foreclosure arrangement usually don’t bring it up first—you have to call them. You may be pleasantly surprised by their agreement, because it ends up costing them less money than a foreclosure.