A deed in lieu of foreclosure is when the homeowner is unable to keep up with payments and turns the property over to the lender. The lender sells the property and uses the proceeds to satisfy the outstanding mortgage. The advantages are minimizing the credit impact of foreclosure and regaining a sense of peace. The disadvantages are that you have to leave your home and you will lose value in your home. Considering the pros and cons and the options available can help you decide whether a deed in lieu of foreclosure is right for you.
Your credit will take a hit with a deed in lieu, but it could be worse. A deed in lieu does not damage your future borrowing power as badly as a foreclosure. The lender may also agree to forgive any portion of the mortgage that is not satisfied after sale of the property. Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners do not have to pay taxes on whatever debt is forgiven. Keep an eye on this law, because it is set to expire on December 31, 2012.
Sense of Peace
Foreclosure is a stressful process full of uncertainties. For some homeowners, it is easier to retain some control and voluntarily give up the home. Making the decision to sign over the home and locating alternate living arrangements can provide a sense of peace during a difficult time.
Vacating Your Home
The foreclosure process, from the first missed payment to the sale at foreclosure, can take more than a year. If you opt for a deed in lieu, you will not be able to hang onto your house for long. The whole idea behind a deed in lieu is that you will sign the deed over to the lender and promptly vacate the property.
Loss of Value
With a deed in lieu, you are giving the house to the bank. If your lender is able to sell the home for more than you owe, the lender keeps the extra cash. If you have equity in the home, you will lose all of that equity. If you owe less than the home is worth, you might be better off trying to sell the home before considering a deed in lieu.
When considering a deed in lieu of foreclosure, contact your lender to discuss your options. Government programs such as Making Home Affordable offer education and assistance in navigating the process to consumers who need it. Other options include refinancing or restructuring the current loan, a short sale or foreclosure.
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