If you’ve never heard of it, you may wonder “what is a deed in lieu of foreclosure?” And “how could it stop foreclosure?”
What is this type of stop-foreclosure deed?
Often referred to as “deed in lieu,” a borrower will use this document to stop foreclosure proceedings. It conveys back to the lender all of the borrower’s interest in the property that was used as collateral in a mortgage or other type of real estate loan.
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Why would you grant a deed in lieu?
To stop foreclosure, this is mostly practiced before proceedings get underway. The primary reason you would willingly sign over your property is to avoid the formal process of being foreclosed.
A repossession is quite damaging to the credit number. It will follow the borrower’s credit record for at least seven years. It’s better for your credit history if you can stop foreclosure before it starts.
Sure, executing a deed in lieu of foreclosure might make the borrower feel like a victim. But the process can be advantageous to both the debtor and the lender.
To stop foreclosure with a deed-in-lieu is taking a positive financial step. Moving forward may help avoid filing bankruptcy. Why let financial walls collapse through inaction.?
Deed In Lieu – Advantage To The Borrower To Stop Foreclosure
One advantage to the borrower is that the deed in lieu of foreclosure will automatically release him or her from their debt to the lender. The debt is forgiven without the negative impact of a foreclosure on your credit record.
The borrower gains freedom from the loan’s financial burdens without going through the extra stress and humiliation of the repossession process. The borrower feels a measure of control in willingly granting the deed-in-lieu to stop foreclosure proceedings from getting underway. Would you rather sit back and taking no action until the sheriff shows up to evict?
Be aware that when you apply for another mortgage, the application may ask whether you have ever executed a Deed In Lieu Of Foreclosure. This deed may contribute negative feedback on your credit rating. However, it is far less harmful than a foreclosure.
It is true that the deed in lieu of foreclosure will not save property that the borrower used as collateral for the loan. You will not recoup the down payment or other payments made. Yet, the act in itself will give an opportunity to acquire another mortgage loan.
If you develop a good relationship with your banker, you can explain the circumstances and the new lender will see your cooperation in a positive light.
Advantage To The Lender
Lenders abhor foreclosures. They are expensive, lengthy and use a lot of staff resources. In accepting a deed in lieu of foreclosure to stop foreclosure proceedings, an advantage to the lender is the total repossession time is considerably less compared to the full process. Your cooperation in willingly forfeiting your collateral saves the lender the cost of the repossession and the expensive legal proceedings.
Preparing For The Deed In Lieu Of Foreclosure
The deed must be created in good faith by both the lender and the borrower. Following are some of the terms:
- Both parties must enter the transaction voluntarily.
- There must be an agreement that the property is at least equal to the current market value. The lender may avoid a proposal for a deed in lieu of foreclosure if the property is worth significantly more at current market value than the remaining balance owed by the borrower.
- The deed must be drawn and presented by the borrower with a proposal stating that the borrower pursues the deed voluntarily, giving the lender evidence rule so that the lender will be protected from possible claims in the future that it acted on bad faith.
- There should not be any other liens attached to the deed.
- The deed must be completed no less than 60 days before the date of the foreclosure sale.
- The lender might require the property to be vacant while negotiating the deed in lieu, and it might request an appraisal of the property before the deed is approved.
To make sure they get every possible advantage, borrowers should get the help of an attorney. To stop foreclosure in this manner, a competent real estate lawyer can prepare the deed in lieu of foreclosure and proposal to the lender in a manner that reflects the statutes of law in that state.