When you buy a home, it acts as collateral for your mortgage, so if you miss too many payments, your lender could legally take it from you with the process of foreclosure. Foreclosure can come with many drawbacks, including the inability to buy another home for years, depending on the type of loan you want to apply for.
Fortunately, there are ways to avoid foreclosure altogether. One of them is a deed in lieu. Take a look at how this option works to determine if it’s right for you.
What is a Deed in Lieu?
A deed in lieu is an agreement to willingly hand over the deed to your home “in lieu” of foreclosure. Your lender would then be the owner of the property so they can make some money back from those missed payments. In turn, your lender would release you from the rest of your debt.
Typically, you and your lender would want to avoid foreclosure. It’s a long, tedious and expensive process that could leave your finances in shambles. While a deed in lieu could still negatively impact your finances, it’s not as detrimental as foreclosure.
Benefits
There are many reasons why you’d want to get a deed in lieu instead of foreclosing on your home in addition to avoiding the cost and time that a foreclosure requires. Here are some of them.
Less Financial Loss
When you hand over your property to your lender, they may be able to waive or reduce your remaining debt. This would be one less debt you’d have to worry about, and since you would’ve been struggling to make these payments in the first place, you could possibly find another place to live that better fits in your budget.
No Public Embarrassment
Sometimes, when a home is in foreclosure, a public notice will be posted on the front door. In addition, during a foreclosure, officials may show up to your property and personally evict you. Many homeowners would rather avoid this public embarrassment and hand over the deed willingly at a prearranged time. This way there are no surprise visits to worry about.
You Could Come to an Agreement
Depending on your lender, they may also be willing to lease the property back to you for a period of time and/or offer relocation assistance to help you find a new place to live. This way, you wouldn’t totally be without a home and could have a plan for your living arrangements after you hand over your deed.
Drawbacks
As with any financial arrangement, there are some drawbacks to a deed in lieu (in addition to losing your home) that you’ll need to consider before moving forward.
Hurts Your Credit Score
A deed in lieu stays on your credit report for years which can affect your ability to apply for a new mortgage and buy another home for a long time. However, a foreclosure is even worse on your credit.
There is a Waiting Period
Depending on the type of loan you want, you may need to wait for a few years before you can even apply for a new mortgage to buy a home. That said, your lender may have some options that allow you to buy sooner.
May Have to Pay Tax Money
Depending on how much of your debt your lender forgives, it could be considered taxable income, which you may have to pay. To make sure you understand what is and isn’t your financial responsibility during tax season, speak with a tax advisor.
Other Alternatives to Foreclosure
A deed in lieu isn’t your only option when it comes to avoiding foreclosure. There are others you may want to consider.
Short Sale
If your lender approves, you may be able to sell your home for less than what you owe on your mortgage. Keep in mind that you may still owe money if you do manage to sell your home in a short sale, and your credit score will take a hit because of the missed payments and sale.
Loan Modification
You may be able to negotiate your loan terms with your lender if the current ones aren’t working for you or your budget. Additionally, it may be possible to come up with a repayment plan or even temporarily pause payments. This could help you stay in your home and avoid the negative effects of foreclosure, deed in lieu or short sale. In many cases, this may be the first step you’ll want to take before perusing other alternatives to foreclosure.
Will a Deed in Lieu Work for You?
Keep in mind that your lender isn’t obligated to accept your deed in lieu. In fact, they can reject it if they find it’s not in their favor to accept. You may want to treat a deed in lieu as a last-ditch effort if other alternatives won’t work for you.
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner. For tax advice, please consult a tax professional.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
