When individuals are unable to afford their monthly mortgage payments, many search for other options that allow them to remain in their home. Others look for solutions that allow them to mitigate damage to their credit score and find a more affordable living option.
For some, this can include going through the foreclosure process. For others, short sale may be an option. For others still, a deed in lieu of foreclosure may be the most attractive option.
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What Is a Deed?
When you purchase a house, there is a necessary transfer of documents from buyer to seller. This paperwork is known as a deed, and it’s significant in that it proves ownership of a particular property.
Deeds generally provide a detailed description of the property, and include information about the previous owners of the property (seller/grantor) and the new owners of the property (buyers/grantee).
In addition to this information, a house deed must include language that permits the legal transfer of the property to take place.
Language Necessary for Deed Transfer
Each state has its own requirements for deed transfer, however, most deeds have the following essential elements:
- Deed transfer must be in writing
- The grantor must have the legal capacity to transfer the property to the grantee, and the grantee must also be capable of receiving the property
- The property must be described in an adequate and thorough manner
- If the property is owned by more than one person, that information must be available to both the grantor and the grantee
- The deed must be legally delivered to the grantee, and accepted by the grantee. This is generally accepted, but in some cases the grantee could reject delivery of the deed.
What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure, otherwise known as a mortgage release, is an option available to certain homeowners who are delinquent on their payments and are hoping to avoid having a foreclosure on their credit history, and are hoping to have a little extra time to plan and execute moving into a different space.
In essence, a deed in lieu of foreclosure is a process where a homeowner or borrower voluntarily transfers the ownership of the property to the mortgage lender. In exchange, you are released from the contract, and are no longer responsible for your payments.
Similarly to a short sale, not all homeowners are eligible to undergo this process. To see if you qualify, you’ll need to contact your loan provider and fill out the necessary documentation. In addition, you’ll need to provide information about your income and expenses, which generally include:
- A financial statement, which includes your monthly income and expenses
- Proof of income
- Your most recent tax returns
- Bank statements for each account you have open
- A statement of hardship
Deed in Lieu vs Foreclosure: Why Apply for a Release of Mortgage?
Applying for a deed in lieu of foreclosure has benefits and consequences. Generally speaking, the foreclosure process will have a far greater negative impact on your finances, credit score, and may impact you for a greater period of time. However, it’s still important that you fully understand the benefits and consequences that come with absolving ownership of your deed.
Consequences of Obtaining a Deed in Lieu of Foreclosure
As with a short sale or a foreclosure, your credit score is going to drop. The amount will depend on what your score was previously, and your individual circumstances. Individuals going through this particular process can expect their credit score to drop from 50 to 125 points, again depending on their particular circumstances.
In contrast, however, those who go through foreclosure or a short sale can expect their credit score to drop from 85-160 points or more.
The main difference between these three options is the length of time in which the damage remains on your credit report. Situations in which you give up your deed to the lender typically only affect your credit for two years, whereas short sales and foreclosures can affect your credit for as long as seven years.
Benefits of Obtaining a Deed in Lieu of Foreclosure
There are multiple benefits to obtaining a mortgage release. Not only does it help to eliminate your mortgage debt, but it can also help you avoid the negative impact of foreclosure. In some cases, depending on the state you live in, you may be eligible for relocation assistance. And under certain Fannie Mae mortgage options, you may be able to purchase a home sooner than if you went through the foreclosure process. For example, some homeowners who go through mortgage release are eligible to purchase a home after two years, where many who go through the foreclosure process have to wait upwards of seven years in order to qualify.
When to Get a Release of Mortgage (Deed in Lieu of Foreclosure)
Obtaining a deed in lieu of foreclosure isn’t for everyone. However, depending on your individual circumstances, the process can be an attractive option if you fall under one of these categories:
- You’re ineligible to refinance your mortgage
- You’re facing a long-term financial hardship
- You know that you cannot afford your home, are at risk of falling behind on your payments, and have no other suitable options
- You owe more than your home than its market value
- You don’t want to sell your home on the market
- You can’t afford your home and are ready for a new start elsewhere
If you believe you’re a good candidate for any of these options, it’s best that you contact your lender and find out the options available to you moving forward.
How to Get a Deed in Lieu of Foreclosure Form
The first step to successfully obtaining a deed in lieu of foreclosure is for the borrower to request a loss of mitigation package from their loan service provider. As mentioned earlier, this documentation must accompany documentation of:
- A financial statement which includes your monthly income and expenses
- Proof of income
- Your most recent tax returns
- Bank statements for each account you have open
- A statement of hardship
If you’re approved for a deed in lieu of foreclosure, your lender will send you the necessary documentation to move forward with the process. You’ll receive a deed that transfers ownership of the property from you to your lender, and an estoppel affidavit. An estoppel affidavit sets out the terms of your agreement which includes provisions that state that you are giving up the property voluntarily.
Depending on the state and your individual circumstance the documentation might also include provisions that state whether the transaction fulfills the debt owed in your mortgage agreement or if the lender has the right to pursue any further monetary action.
Why Your Mortgage Release May Be Rejected
Technically speaking, a lender has no obligation to accept your request for a deed in lieu of foreclosure, although in many cases it is in their best interest to do so. Otherwise, if you can prove that the bank failed to mitigate its damages by refusing your deed in lieu, you may have a defense should you owe any money after the process is over.
Regardless of whether your deed in lieu of foreclosure is accepted, it’s advisable that you contact a knowledgeable attorney before taking the plunge.
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