What is a deed in lieu of foreclosure?
So a foreclosure is on the horizon and perhaps even seems
inevitable. What can be done to avoid it?
One feasible option for both the lender and the borrower
is for the borrower to offer a deed in lieu of foreclosure
to the lender.
Put simply, this is basically a compromise in which the
title of the property is given to the lender in exchange
for the borrower being released of any indebtedness to the
lender. The borrower offers the title up to the lender in
order to satisfy the debt.
When a foreclosure is imminent, a deed in lieu of foreclosure
(DIL) may be an appealing offer for the lender because it
can speed up the process and can save the lender from many
of the costly expenses involved in foreclosing on a home.
This is relatively good news for the buyer since he/she
can put the burden of the loan behind and avoid some of
the consequences of foreclosure.
However, some lenders may be hesitant to accept a deed
in lieu of foreclosure because if it appears that the lender
coerced the borrower into accepting the DIL, there can be
legal ramifications for the lender. Furthermore, the lender
may be burdened by having to take on other liens against
the title. And not all lenders will accept a DIL.
A deed in lieu of foreclosure is not the best alternative
for everyone. While some may benefit by being able to walk
away from a heavy burden, others may find that the consequences
of doing so outweigh the benefits. Because of the possible
impact that a DIL may have, it should only be considered
as a last resort.
For instance, if there is a large amount of equity
tied up in a home, a DIL may not be a good option. In
this particular case, it may be a better option to try and
sell the home to keep some of the equity that has been built
up over the years.
A major consideration is how it will influence credit.
Just because the property has not been foreclosed on, that
does not mean that credit will not be affected. A deed
in lieu of foreclosure can show up on credit just as easily
as a foreclosure.
And don't forget about the late payments that lead to
the situation in the first place. These, of course, will
not be removed from credit reports either. For this reason,
other alternatives should be sought out first.
What can be accomplished and how much will be reported
to credit bureaus depends strongly on the lender, so it
is essential to communicate with the lender to work out
the best compromise possible for both parties.
The borrower also needs to be aware of the fact that lenders
do occasionally report a foreclosure to the credit bureaus
when a DIL has been agreed upon. It is always advisable
to get any agreement in writing and negotiate a cleaner
credit report as part of the deal. In other words, have
the lender put in writing that a foreclosure will not show
up on the credit report.
So whether a deed in lieu of foreclosure is right for any
individual varies from one person to another. It is important
to take a look at the situation and clearly define what
alternatives are available before making a decision.
In the instances where we have helped homeowners try a
deed in lieu of foreclosure the lender required the homeowner
to list the house with a Realtor for 6 months before they
would consider it. This is not something most Texas homeowners
can do and so this option is the least used of all the 6
foreclosure options you have at your disposal.
But if you do need help with a
DIL, call us for a FREE Situation Analysis and we will go
over it with you.
Back to Foreclosure
Options
