Foreclosure can happen to homeowners who miss their mortgage payments consecutively. Folks fall behind on their home payments for a number of reasons ranging from a loss of job to health setbacks to divorce.
In accordance to foreclosure law, lenders can complete an eviction and auction off the house. The auction price is usually a low bargain price since the goal of lenders is to minimize their loss and get rid of the property. Borrowers end up losing their home and their credit may be negatively impacted for a number of years.
However, there are alternatives to foreclosure that allows individuals to walk away from their home without suffering the harsh consequences of falling into foreclosure. Alternative options include a short sale and deed in lieu of foreclosure.
We can define deed in lieu of foreclosure as a process of transferring the title of one property from the homeowner (borrower) to the bank (lender), duly signed and notarized for public documentation and records. This is a voluntary process of title-transfer from the borrower to their lender. Doing so allows homeowners avoid foreclosure and all of the negative impacts which includes a 5 year restriction on future home purchases.
In the deed in lieu of foreclosure process, the fair market value of the property will offset any unpaid mortgage amount the borrower may have with the lender. By completing the deed in lieu of foreclosure, it releases the borrower from any obligations and liabilities on his or her mortgage with their lender.
The lender has the right to approve the deed in lieu first. Upon checking a borrower’s other loans and lines of credit, they might refuse to accept the deed. If a borrow has multiple mortgages, he or she may be rejected. In this situation, there are other options to avoid foreclosure.
There could be cases where a borrower is still left with debt obligations to the lender after the completion of a deed in lieu. This is what we call Deficiency Judgements. To avoid this situation, the agreement should clearly state that the transaction or completion of deed in lieu is in full compliance and/or satisfaction of the debt.