Understanding Deed in Lieu of Foreclosure

Homeowners who are faced with foreclosure will likely want to know about all of the possibilities open to them, and one of the lesser-known options for avoiding the financial penalties involved in a property foreclosure is called a deed in lieu of foreclosure. This process involves the buyer actually giving the property back to the lender, in exchange for some absolution of related debt. A deed in lieu of foreclosure can be tricky, and knowing more about this somewhat unusual option may be important for those who are facing foreclosure due to lost income, job loss, rising costs of living, or others of issues related to poor economic times.

Alternatives to a Deed in Lieu of Foreclosure

Homeowners who are scrambling to get solutions for a possible foreclosure or eviction want to generate as many possibilities as they can. Before looking into a deed in lieu of foreclosure, many will research a possible refinancing or loan modification that would help them to meet their monthly payments and stay in a home. For a great number of homeowners, a deed in lieu of foreclosure is a last resort.

The Basics of a Deed in Lieu of Foreclosure

In a deed in lieu of foreclosure scenario, the borrower agrees to sign back the deed or title of a property to the lender. The lender agrees on a “fair market value.” The borrower then gets a write down or write off of a debt.

The key thing to remember in a deed in lieu of foreclosure is that the borrower may still owe on the difference between that fair market value negotiated with the lender, and the actual amount of the mortgage. A key principle here is the LTV or loan to value ratio, an often troublesome reality for homeowners. Some who have taken out expensive mortgages, including many homeowners who were in fact taken advantage of in the original mortgage process, now owe much more than their home is currently worth. A deed in lieu of foreclosure would still leave these individuals with residual debt, which could be more easily pay down than a total property debt, but could still be a schedule financial liability.

Entering a Deed in Lieu of Foreclosure Agreement

Some lenders will agree to a deed in lieu of foreclosure, knowing that they will be faced with foreclosure anyway. However, there can still be some challenges involved in the overall agreement. Without good professional assistance, a borrower and a lender can dance around the prospect of a deed in lieu of foreclosure deal, not fully trusting whether the process will be completed. Experts call successful negotiations a “good faith agreement” where the lender except an assessed value for the returned deed or title to the property.

The bottom line is that government officials and others are trying desperately to find efficient ways to deal with high-LTV mortgages and eventual for closures. Some creative deals involve a deed in lieu of foreclosure where the successful agreement actually cuts costs for the lender, and lets the borrower opt out of sizable amounts of debt. It’s in the homeowner’s best interests to learn more about the deed in lieu of foreclosure and other possibilities, including those related to the government’s new Make Home Affordable program aimed at helping families to stay in their homes in turbulent economic environments.