Foreclosing on a home can have long-lasting, dire consequences for your financial health. In 2021, more than 92,000 foreclosures were in process in the United States. That may sound like a lot, but it was an all-time low. In 2020, there were more than 214,000 foreclosure cases.
Foreclosures are a homeowner’s worst nightmare because the home they worked hard to purchase and maintain is gone, and their ability to buy a new house is severely diminished. While there are several ways to avoid foreclosure, one you may not be as familiar with is called a deed in lieu of foreclosure.
What is a deed in lieu of foreclosure?
The deed in lieu of foreclosure transfers the title of a house from the borrower to the lender. The lender owns the home, and the borrower gets out from under their mortgage. While a deed in lieu of foreclosure will still affect your credit report, it’s often less detrimental than a full foreclosure.
For a deed in lieu of foreclosure to be applied, the borrower and the lender must agree to the exchange. A legally binding contract seals the deal.
What are the pros and cons of a deed in lieu of foreclosure?
In addition to losing a home in foreclosure, many homeowners struggle with the public parts of foreclosure. Foreclosures are public records, meaning that your neighbors and any buyers interested in purchasing your home could learn about the foreclosure process. Many homeowners are also uncomfortable facing their lenders because they feel embarrassed that they couldn’t manage their payments.
A deed in lieu of foreclosure helps relieve some of that embarrassment, as it’s often a less public process. When a lender and homeowner agree to a deed in lieu, they can outline a vacate date so they can avoid a public eviction. In some cases, lenders will allow the former homeowner to lease the property until they find a new place to live.
Like foreclosure, a deed in lieu of foreclosure results in property loss. In addition, some states require borrowers to pay the difference between the property value and what a homeowner still owes. You should check the rules in your state and request that the lender waives that requirement if you cannot afford the cost.
Why would a lender deny the deed in lieu of foreclosure?
There are several reasons a lender might refuse to do a deed in lieu of foreclosure. Some things the lender considers when deciding if it’s a good choice for your loan include:
- The current market conditions
- Your home’s value
- How much you owe on your loan
- How far behind you are on your payments
In today’s market, when homes are in short supply, lenders may be more likely to accept a deed in lieu of foreclosure because they could sell the home quickly. Some lenders may take the option just to avoid the time and cost of a foreclosure.
Some reasons your lender might refuse to take the property back include:
- Other liens on your home
- A low property value due to a sluggish market or property condition
How long does a deed in lieu of foreclosure stay on your credit?
Your credit score will still take a hit with a deed in lieu of foreclosure, but it won’t be as severe as with a foreclosure. The deed in lieu will stay on your credit for 4 years, whereas a foreclosure will remain on your credit report for 7 years. A deed in lieu also allows you to buy a home sooner than taking a full foreclosure.
Other options for avoiding foreclosure
While a deed in lieu of foreclosure is preferred to the whole foreclosure process, you may have other options. Here are a few other things to consider:
During a loan modification, the lender changes the terms of your loan. This can mean adjusting how much you pay each month, the interest rate, your due date, or the length of your loan term. You will need to show that you have assets and income to support a new payment, and your lender doesn’t have to agree to a loan modification. If you want to stay in your home, this is an ideal first option.
A short sale lets you sell your home for less than you owe. A short sale will affect your credit score, but it does less damage than a foreclosure or a deed in lieu of foreclosure. In some states, you may have to pay the difference between your loan balance and the home’s sales price.
Sell your home for cash:
If you need to sell your home quickly, accepting a cash offer can help you get away from a foreclosure. Depending on the market and your home condition, you could walk away without additional mortgage contributions.
If you want to know how much your home is worth and whether selling your house for cash is the right fit, we’re happy to help. Reach out today for a quick cash quote.