Deed-in-Lieu of Foreclosure
The Deed-in-Lieu of Foreclosure allows a mortgagor in default, who does not qualify for any other HUD Loss Mitigation options, to voluntarily sign the house back over to the lender. A homeowner is sometimes better off signing a Deed-in-Lieu rather than letting the lender start or finish the foreclosure proceedings. That is because, with the signing of a Deed-in-Lieu, the borrower is voluntarily giving the home back to the bank. Although the loan default would be entered on your credit record, it may not do the damage that a full foreclosure would.
Foreclosures typically stay on your credit for at least 7 years. By going the Deed-in-Lieu route, you can also avoid the time and stress involved in fighting a foreclosure battle that the lender will probably win. In addition, with a Deed-in-Lieu of foreclosure, the lender or mortgage servicer can pay, not to exceed $2,000 compensation, to you, the homeowner. However, the $2,000 compensation is not paid to you until you have vacated the property. Furthermore, any compensation must be applied to any junior lien(s) placed on the mortgaged property. The loan servicer may determine that a “current” mortgagor is eligible for the Deed-in-Lieu of foreclosure option.
Under no circumstances should you be encouraged to default on your mortgage for the purpose of qualifying for this option. A Deed-in-Lieu must be completed or foreclosure initiated within six (6) months of the date of default, unless you qualified for an extension of time by first trying a different loss mitigation option or an extension of time was approved by HUD prior to the expiration of the time requirement. If the Deed-in-Lieu follows a failed special forbearance agreement, or the pre-foreclosure sale program, then the Deed-in-Lieu must be completed or foreclosure initiated within 90 days of the failure.
A Deed-in-Lieu can only be done when you have one mortgage on the property. If you have a first and second mortgage, you cannot pursue a Deed-in-Lieu. Also, there will be income tax consequences as a result of the Deed-in-Lieu of Foreclosure.