The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan.
The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of a repossession, and additional advantages if the borrower subsequently files for bankruptcy.
In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed.
Generally, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair market value of the property.
Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily.
This will enact the parol evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.
Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.
Lenders have a department (typically called a loss mitigation department) that processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located.
Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, requiring potentially multiple levels of approvals and conditions. Junior liens - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve the short sale.
Frequent objectors to short sales include tax lieners (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.
One disadvantage for the lender is that, he/she needs to look at the property as an ordinary real estate buyer, creating the need to do a ?due diligence?. He/She has to check on the physical and legal condition of the property. Inspecting the property of its damages and other environmental concerns is a must. Also, during title inspection, the lender has to check if there have been any liens such as mechanic liens or deed of trusts in the public records.
On the other hand, foreclosure could be advantageous. This wipes out all the liens attached to the property as soon as the lender has made his/her loan. If everybody concerned have been notified and the process is correctly executed; then the property in foreclosure would be cleared of all the liens - once it has been delivered to the lender.
However, if the title is not in good condition, then the lender would not be interested for a deed-in-lieu.
The interest of the lender on a deed-in-lieu could depend on the distressed homeowner's willingness to attach any liens and what those liens are on the property.Attaching a deed-in-lieu could bring an upside or a downside for the homeowner.
What troubled homeowners think is that a deed-in-lieu can avoid foreclosure. But the lender would then prepare a deed-in-lieu agreement attached with the deed, which will all be placed in your public records. Now that it is in the records, this could reach credit reporting services and your credit rating might decrease.
But a deed-in-lieu may be better than a foreclosure for it shows your willingness to negotiate with the lender, which sounds like a good impression.
Both Tarun Jaswani & Joseph Smith are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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