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A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) option, together with brief sales, loan adjustments, payment strategies, and forbearances. Specifically, a deed in lieu is a transaction where the house owner willingly transfers title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.

For the most part, finishing a deed in lieu will launch the customer from all responsibilities and liability under the mortgage contract and promissory note.

How Does a Deed in Lieu of Foreclosure Work?
Deficiency Judgments Following a Deed in Lieu of Foreclosure
Mortgage Release Program Under Fannie Mae
Should You Consider Letting the Foreclosure Happen?
When to Seek Counsel
How Does a Deed in Lieu of Foreclosure Work?

The very first action in acquiring a deed in lieu is for the borrower to ask for a loss mitigation bundle from the loan servicer (the company that manages the loan account). The application will need to be completed and sent along with documentation about the customer's income and expenditures consisting of:

- proof of earnings (generally 2 recent pay stubs or, if the customer is self-employed, a profit and loss declaration).

• current income tax return.
• a financial declaration, detailing monthly earnings and expenses.
• bank declarations (typically 2 current declarations for all accounts), and.
• a difficulty letter or difficulty affidavit.
  
  What Is a Difficulty?
  
  A "hardship" is a scenario that is beyond the customer's control that leads to the customer no longer having the ability to manage to make mortgage payments. Hardships that get approved for loss mitigation consideration consist of, for example, job loss, reduced income, death of a partner, health problem, medical expenses, divorce, interest rate reset, and a .
  
  Sometimes, the bank will need the debtor to try to sell the home for its reasonable market price before it will think about accepting a deed in lieu. Once the listing period expires, presuming the residential or commercial property hasn't offered, the servicer will purchase a title search.
  
  The bank will generally just accept a deed in lieu of foreclosure on a very first mortgage, implying there must be no extra liens-like 2nd mortgages, judgments from lenders, or tax liens-on the residential or commercial property. An exception to this basic guideline is if the exact same bank holds both the first and the 2nd mortgage on the home. Alternatively, a customer can pick to settle any additional liens, such as a tax lien or judgment, to facilitate the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers price opinion (BPO) to figure out the reasonable market worth of the residential or commercial property.
  
  To complete the deed in lieu, the customer will be required to sign a grant deed in lieu of foreclosure, which is the document that moves ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the terms of the contract in between the bank and the borrower and will include an arrangement that the borrower acted freely and voluntarily, not under browbeating or pressure. This document may also include provisions attending to whether the deal is in complete complete satisfaction of the financial obligation or whether the bank deserves to seek a deficiency judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is frequently structured so that the transaction pleases the mortgage debt. So, with the majority of deeds in lieu, the bank can't get a deficiency judgment for the difference in between the home's reasonable market worth and the financial obligation.
  
  But if the bank wishes to maintain its right to seek a shortage judgment, the majority of jurisdictions permit the bank to do so by clearly specifying in the transaction files that a balance remains after the deed in lieu. The bank usually needs to define the quantity of the deficiency and include this amount in the deed in lieu files or in a separate agreement.
  
  Whether the bank can pursue a deficiency judgment following a deed in lieu also sometimes depends upon state law. Washington, for example, has at least one case that mentions a loan holder may not obtain a shortage judgment after a deed in lieu, even if the consideration is less than a complete discharge of the debt. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that due to the fact that the deed in lieu was effectively a nonjudicial foreclosure, the debtor was entitled to protection under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a customer who is qualified for a deed in lieu has 3 choices after finishing the deal:
  
  - vacating the home immediately.
• entering into a three-month shift lease without any rent payment required, or.
• participating in a twelve-month lease and paying lease at market rate.
  
  To learn more on requirements and how to engage in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you may be eligible for a special deed in lieu program, which may consist of moving assistance.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a shortage judgment against a property owner as part of a foreclosure or after that by submitting a separate suit. In other states, state law avoids a bank from getting a shortage judgment following a foreclosure. If the bank can't get a shortage judgment against you after a foreclosure, you may be much better off letting a foreclosure happen rather than doing a deed in lieu of foreclosure that leaves you responsible for a deficiency.
  
  Generally, it might not deserve doing a deed in lieu of foreclosure unless you can get the bank to agree to forgive or minimize the deficiency, you get some money as part of the deal, or you get extra time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For particular suggestions about what to do in your particular situation, speak to a local foreclosure lawyer.
  
  Also, you ought to consider how long it will take to get a brand-new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for example, will purchase loans made two years after a deed in lieu if there are extenuating circumstances, like divorce, medical costs, or a task layoff that caused you financial trouble, compared to a three-year wait after a foreclosure. (Without extenuating scenarios, the waiting duration for a Fannie Mae loan is seven years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, short sales, and deeds in lieu the exact same, typically making it's mortgage insurance coverage readily available after 3 years.
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  When to Seek Counsel
  
  If you require aid comprehending the deed in lieu procedure or translating the documents you'll be required to sign, you need to consider seeking advice from a certified attorney. A lawyer can also help you work out a release of your individual liability or a reduced deficiency if necessary.