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For many homeowners, foreclosure is a stressful and devastating experience. Not only does it result in the loss of one's property, but it can also significantly impact credit score. Fortunately, there are alternatives to foreclosure, such as a deed in lieu of foreclosure.
As a REALTOR®, you can help advise your clients on the best course of action to take when facing financial difficulties by being versed in some options. Let's discuss what a deed in lieu of foreclosure is, when lenders accept it, and why as a real estate professional, you should familiarize yourself with this process.
What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is an agreement between a borrower and their lender to transfer property ownership to the lender if the borrower cannot make their mortgage payments. In lieu of facing foreclosure, the borrower relinquishes ownership of the property to the financial institution. Through a deed in lieu, the borrower voluntarily gives up their rights to the property to avoid foreclosure while discharging them from their loan obligation.
This process can help avoid the hassles of foreclosure, such as court proceedings, auctions, and judgments. Instead, the lender can sell the property on the open market and may recoup funds.
When Will a Lender Accept a Deed in Lieu of Foreclosure?
A deed in lieu aims to reduce the financial losses for both the lender and the borrower. Inasmuch, lenders will only accept a deed in lieu of foreclosure in specific circumstances.
There are basic qualifications like whether the homeowner:
- Can prove financial hardship according to lender requirements.
- Don’t qualify for a loan modification.
- Have tried to sell the house unsuccessfully.
- Has been delinquent on payments for an extended period and is unlikely to be able to make mortgage payments.
However, there are other common reasons a lender may accept a deed in lieu agreement, including:
To Avoid Litigation
The legal process of foreclosure often can't start in the first 120 days after a homeowner is behind on their mortgage; the amount of time until foreclosure varies by state. And, when a foreclosure process gets contentious, the homeowner and the lender could incur legal fees and extended litigation.
Some lenders may be open to a deed in lieu to avoid these expenses. Homeowners who realize they're heading for foreclosure and wish to avert the unpleasant procedures and costs may consider this option. The foreclosure process can be extended and take months or even longer to complete.
A deed in lieu is a quicker alternative to foreclosure as it expedites transferring ownership from the homeowner to the lender. Using this option, the lender can save time, hastening the seller's return to potentially creditworthy status.
To Preserve the Condition of the Property
Foreclosed properties are often left vacant for extended periods, and without proper upkeep and maintenance, these properties can quickly become rundown and unattractive. By accepting a deed in lieu of foreclosure, lenders may take possession of the property sooner and keep it in better condition.
The lender may be more likely to approve a request for a deed in lieu on a home in good condition so they can sell the property quickly and at a fair market rate.
If the Homeowner Owes More Than Fair Market Value
In some cases, lenders may also accept a deed in lieu if they believe that it would be more beneficial than foreclosing on the property. This is especially true if the homeowner owes more than fair market value for their home, as this means they would not be able to sell it for enough money to pay off their mortgage debt even after going through foreclosure proceedings.
In these cases, lenders may find that accepting a deed in lieu is more cost-effective than foreclosure proceedings and trying to recoup their losses by selling off an overvalued home.
It's worth noting that lenders may still decide to pursue foreclosure if they believe it's in their best interest.
When Will a Lender Reject a Deed in Lieu of Foreclosure?
Lenders are not obligated to accept a deed in lieu of foreclosure, as all cases are assessed individually based on specific criteria.
Understanding when and why a lender might reject such an agreement is vital if your client is considering this route. This can include:
If There Are Other Claims to the Property
Other claims to property can create complications in the deed in lieu of foreclosure process. For example, if a homeowner has a second mortgage and they apply for a deed in lieu of foreclosure, the second mortgage lender might not release their claim to the property.
Similarly, if there are unfulfilled tax liens on the property, the lender may not accept a deed in lieu of foreclosure. In such instances, it's best to resolve all claims to the title before applying for a deed in lieu of foreclosure, or clients may wish to seek legal advice.
If the Property Has Not Been Kept in Good Condition
In general, you should maintain and keep the property in good condition to match market standards to qualify for a deed in lieu of foreclosure.
Suppose the property is damaged or poorly maintained. In that case, the lender may ask that the homeowner make repairs before agreeing to the deed in lieu of foreclosure or reject the request altogether.
Step by Step: How to Request a Deed In Lieu of Foreclosure
Requesting a deed in lieu of foreclosure can be complicated, but it's essential to understand the process to assist clients effectively.
While the process may vary depending on the lender, here are the key steps involved in a request for a deed in lieu:
#1 Fill Out an Application
The application will often ask for details about the borrower's financial situation, including income, debts, and expenses. This information helps the lender assess the borrower's ability to repay the loan and evaluate whether a deed in lieu of foreclosure is viable.
As a real estate professional, it's important to ensure the borrower completes the application accurately and completely.
#2 Provide Documents
After completing the application, the homeowner must provide various documents to their lender. These documents typically include financial statements, tax returns, and proof of income, though each lender may require different documents.
The homeowner may also need to provide a hardship letter explaining why they can't keep their home. Situations that qualify as hardship depend on the lender but may include job loss, medical emergencies, or other serious situations that impact income. Lenders may also request to check homeowner credit scores or additional personal financial information.
As a real estate professional, you can help your client by ensuring that all the documents are provided on time and accurately.
#3 Attempt to Sell
In some cases, the lender may require the homeowner to attempt to sell the property before accepting a deed in lieu of foreclosure. This is because selling the property may bring in more money than simply taking ownership of it, and it helps reduce bank involvement in real estate transactions.
In these cases, the lender often gives the homeowner a set amount of time, usually around three months, to sell the property.
Help your client by marketing and listing their property and assisting them in selling it at the best price possible to improve the odds of getting an offer.
#4 Title Search
Once the lender approves the deed in lieu of a foreclosure application, they'll typically conduct a title search to ensure that there are no other liens or judgments on the property.
If there are any outstanding liens, the lender may deduct the cost of satisfying them from any funds generated from the sale of the property or transfer of the deed in lieu of foreclosure. In addition, the borrower will sign a "release of liability," which states that they'll not pursue legal action against the lender concerning the mortgage and sometimes vice versa.
Real estate professionals can help the borrower by suggesting ways to reconcile any title issues.
#5 BPO Appraisal
The lender often orders a Broker Price Opinion (BPO) appraisal to determine the property's current value. This appraisal will help the lender determine if accepting a deed in lieu of foreclosure is in their best interest.
If the appraisal determines that the home is worth less than what the homeowner owes on the loan, the lender may still accept a deed in lieu.
Provide your clients with a comparative market analysis to help them understand the value of their property.
#6 Final Signatures: Grant Deed in Lieu of Foreclosure
Once the appraisal is complete, the borrower and lender will negotiate and agree on a fair price for the property. If the agreed-upon amount is lower than the amount owed on the mortgage, the lender may waive the remaining balance.
The borrower will then sign a Grant Deed in Lieu of Foreclosure, which transfers property ownership to the lender, who will issue a satisfaction on the mortgage.
It is essential to ensure that transferring property ownership is smooth and error-free.
Options to Consider Before Pursuing a Deed In Lieu of Foreclosure
Deciding to pursue a deed in lieu of foreclosure can feel overwhelming for those facing financial hardship. It's important to know that this option, while faster than foreclosure, still has potential drawbacks.
If a homeowner faces foreclosure, exploring all options before pursuing a deed in lieu is essential. From loan modification to selling the property, there may be another solution, and as a REALTOR®, it's a good idea to be versed in some of these options so homeowners don't feel trapped.
Here are a few:
Sell the Property
In some cases, selling the property may be a better alternative. Selling the property might allow the homeowner to pay off the existing mortgage, meaning foreclosure isn't necessary.
Though, if there have been unsuccessful attempts to sell the house, or the market has changed, and the homeowner owes more than what the home is worth, also known as 'upside down,' selling may not be the best option.
Loan Modification
A loan modification changes a mortgage agreement's original terms and conditions. It can help homeowners modify their existing mortgages to make their monthly payments more affordable. Changing terms is beneficial if the goal is to keep the house, but the homeowner is struggling to make mortgage payments.
Loan modifications can extend the life of the mortgage, reduce interest rates, or reduce monthly payments, depending on the circumstances.
Mortgage Forbearance
Mortgage forbearance is an agreement between the homeowner and the lender that allows for temporary suspension or reduction of mortgage payments. Suppose a homeowner is experiencing a short-term crisis, especially one that impacts finances, like job loss or illness. In that case, the lender may be willing to offer a temporary pause on mortgage payments while the homeowner rebuilds financial stability.
REALTORS® may be able to work with lenders to get forbearance agreements for their clients.
Contact the Lender
Lenders may be willing to work with homeowners who are facing financial difficulties. REALTORS® can mediate between the homeowner and the lender, helping clients contact the correct department and representative.
Contacting the lender might lead to a discussion of alternate payment plans, mortgage forbearance, or even a loan modification, as mentioned above.
FHA Programs
You may be able to help clients take advantage of various programs offered by the Federal Housing Administration (FHA) if they're an FHA borrower.
For example, the Homeowner Assistance Fund was federally funded and designed to help homeowners at risk of default, foreclosure, or displacement because of the pandemic. There was also the Making Home Affordable which offered mortgage relief to homeowners to prevent foreclosures.
Often these programs provide a reduced mortgage payment, a lower interest rate, or even assistance with refinancing.
REALTORS®: Navigating Deed in Lieu of Foreclosures
Understanding the when and why of a lender accepting or rejecting a deed in lieu of foreclosure can be the difference between successful resolution for your clients and costly litigation.
Knowing what's necessary to qualify can help you guide homeowners through these difficult decisions. It's also essential to keep up with current industry trends since the rules may change—the more knowledgeable you are, the better prepared you'll be to meet your client's needs during this process.