Before Turning to Foreclosure, Try This Little-Known Option

by Miranda Marquit · 4 comments

Even though the recession has technically been over for a few years, the reality for many Americans is that it’s still hard to pay their bills, including their mortgages. While the number of home loans in distress has fallen in recent years, there are still a number of homes on the brink of foreclosure.

Perhaps you’re one of those who is contemplating letting their home go to foreclosure, or you’re concerned about what to do next. If you want to avoid foreclosure, but don’t know how you can afford to keep your home, Matthew Reischer, Esq., and CEO of LegalAdvice.com, says that a deed in lieu of foreclosure might be the answer.

What’s a Deed in Lieu of Foreclosure?

There are times when unexpected circumstances conspire to make your financial situation difficult — and in these cases, you might be in danger of losing your house. If you think you’ll be able to overcome these problems, work with your mortgage lender to get a loan modification, or see what other options there are. If it doesn’t look like you’ll recover, however, Reischer says a deed in lieu of foreclosure might help.

“A deed in lieu of foreclosure is a deed instrument in which the borrower conveys all interest in a real property to the lender,” Reischer explains. “It is meant to satisfy a loan that is in default and to avoid foreclosure proceedings.”

According to Reischer, there are two main advantages of a deed in lieu of foreclosure:

  1. “The primary advantage to the borrower is that it immediately releases the borrower from all personal indebtedness associated with the defaulted loan,” he says. This means that once the deed is transferred, you’re no longer personally responsible for the amount of the loan. The lender owns your home and is responsible for it.
  2. “The borrower avoids the notoriety of a foreclosure proceeding on their credit,” Reischer continues. “Often, the borrower also receives better terms than they would in a formal foreclosure.” It’s important to note, however, that a deed in lieu of foreclosure will still have some negative consequences on your credit situation — so you should consult with an expert before pursuing this course of action.

Depending on the situation, the lender might also benefit from a deed in lieu of foreclosure — especially if state law requires they jump through a number of hoops before the foreclosure process can be completed.

It’s important to understand, though, that this solution might not be accepted by your lender. The lender has to agree on the deed in lieu of foreclosure for it to work, and some lenders are more inclined just to foreclose or seek other avenues.

No matter what happens, it’s a good idea to know about your options so you can explore them all with your lender. This is just one of your choices when you can’t make your home loan payments.

Have you ever heard of a deed in lieu of foreclosure?

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  • Ryder says:

    Be aware that if you have a second lien of any kind — HELOC, tax lien, etc. — the lender will not accept a DiL. A foreclosure wipes out junior liens, while a DiL does not. The lender does not want the property with other liens on it and will prefer to foreclose to wipe them out.

  • Michelle says:

    I have never heard of this as well. It is something to think about if we are even in a situation like this.

  • Interesting! I’ve never heard of this, and I’m not going into foreclosure, but still..really interesting!

  • Mike says:

    We moved out of state and couldn’t sell our house for our loan value. When we spoke with the lender, they wanted out tax returns and other financial info for 2 years to even look at the DIL option.

    The FC option was much better. Just stop paying and walk!

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