Foreclosure Alternatives: Deed in Lieu of Foreclosure
What you Need to Know
A deed in lieu is somewhat similar to a short sale but instead of providing your lender with a qualified purchaser of the property you exchange to your lending institution the title to your property in exchange for the cancellation of the loan. In return your lender does not initiate foreclosure or agrees to terminate any existing foreclosure proceedings. Keep in mind that your lending institution typically has no desire for your property. As a result, for most homeowners, a deed in lieu option is not available until your home has been on the market for several months.
Why a Deed in Lieu Might Make Sense
Just like a short sale, the use of a deed in lieu is one potential solution to avoiding foreclosure and if done correctly a deed in lieu can be negotiated to allow homeowners to avoid a deficiency judgment against them.
The most attractive portion of the deed in lieu is that after the process is completed, you are completely released from the debt associated with the loan in some circumstances.
Disadvantages of Deed in Lieu
Keep in mind that when you are considering a Deed in Lieu of foreclosure you are really offering to your bank the option of retaking the title to your property, which your bank will then have to turn around and sell to a qualified buyer. If you have additional interests that have placed liens on your title, like second mortgages or tax liens, or home equity loans, then your bank will not have clear title to freely dispose of your property. Those sort of issues make a deed in lieu unattractive option if you have second mortgages.
A deed in lieu of foreclosure will also have some serious potential tax consequences. Fortunately, the Mortgage Forgiveness Debt Relief Act which was in play for 2013 allows a debt to be forgiven if it related to a borrower’s primary residence and certain other conditions applied. If you’re considering a deed in lieu as a foreclosure option, make sure you speak with a qualified professional to consider your potential tax consequences.