If you're having trouble paying your mortgage, you may be tempted to voluntarily give your house to the bank to avoid the foreclosure process. Surrendering the deed, or title of your house, to your mortgage company is not as simple as mailing in your keys. The procedure is known as a deed in lieu of foreclosure, and you must follow your bank's regulations to be rid of your financial burden.
Surrendering the deed to your house can be more private and take less time than a short sale or a foreclosure. Your neighbors may not even know you're trying to remove yourself from the obligation of paying your lender. In a short sale, you must list your property for less than the amount you owe on it and gain approval from your bank to accept the sale price as payment in full. In a foreclosure, the lender takes your property from you for non-payment of your mortgage after a drawn-out procedure that may include a court judgment in some states.
You must qualify for a deed in lieu of foreclosure before the mortgage company will consider your request. Banks may require you to complete a hardship package, which includes a detailed explanation of your situation and the fact that it may not improve. For example, if you're permanently disabled and can no longer perform in a job or if your spouse died and you can't replace the lost income, you may be allowed to surrender your deed. In addition, most financial institutions will not approve the transaction if you have other liens on your house, such as a second loan, because the titleholder also inherits all other debt related to the property.
Send your hardship package and supporting documents, such as wage statements and tax forms, to your mortgage company. You may qualify for a loan modification, in which case you will not be granted a deed in lieu. Your lender can require you to list your house first to attempt a short sale, which can defeat the purpose of surrendering title if you are keeping it a secret. If your house is on the market for a long period of time, such as three months or more, you have a better chance of the bank accepting your deed as full payment of the balance of your loan. If your bank agrees to take your house, you cannot leave it in poor condition or the deal may be voided.
A completed deed in lieu of foreclosure may have a negative impact. Your credit score can drop by the same number of points as it would in a foreclosure or short sale, depending on your current credit history. In addition, you can be held responsible for paying income tax on the amount of your loan that was forgiven in the transaction. Before attempting to surrender your deed, talk to an accountant or tax adviser about your particular situation.
- Blass Homes: Deed in Lieu of Foreclosure Q & A
- The Giardinelli Law Group, APC: Risks and Benefits of a Deed in Lieu of Foreclosure
- BankUnited: Deed-in-Lieu of Foreclosure
- Wells Fargo: Deed in Lieu of Foreclosure
- GMAC Mortgage: Deed in Lieu (Property Transfer)
- CNN Money: How Foreclosure Impacts Your Credit Score