Is mortgage foreclosure staring you in the face? When mortgage problems crop up, you may have a choice of solutions to save your home or exit as gracefully as possible.
- The Home Affordable Refinance Program (HARP) can allow you to refinance to a better mortgage rate, even if you owe more on your mortgage than your property is worth. Your mortgage loan must be guaranteed by Fannie Mae or Freddie Mac.
- For others whose mortgage has become unaffordable, a loan modification under the Home Affordable Modification Program (HAMP) could be the answer.
- Homeowners experiencing temporary shortfalls may get a forbearance from their lender and skip a few payments.
Unfortunately, if your problem is ongoing unemployment, a medical injury, or other major long-term financial road block, these programs won't help -- you have to have a sufficient and stable source of income to qualify for any of them. Sometimes, you have to let the house go.
What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a voluntary alternative to a foreclosure proceeding. It requires that you give up your rights to the property and sign it over to your lender, which releases you from your mortgage obligation. Because it takes place outside the court system, it is a less expensive way out than a traditional foreclosure proceeding.
Why Would a Lender Accept a Deed In Lieu of Foreclosure?
Lenders are most likely to agree to a deed in lieu of foreclosure if the following is true:
- Your mortgage balance exceeds your property's value.
- You live in a state where the lender cannot come after any of your other assets, such as California, or or you don't have accounts that could be seized.
If you have considerable equity in your home, your lender or servicer could foreclose, sell your property, and recover most or all of the balance on the mortgage -- plus the costs of foreclosure. If that's not the case, and the sale of the home does not cover the loan, the lender could sue you for any shortfall after the foreclosure sale. If the lender thinks he can recover more of his loss by tapping your other assets, it is unlikely that he would accept a deed in lieu of foreclosure, since this would ensure a loss on the transaction.
However, when there is little or no chance of recouping the costs and loan balance by foreclosing, the lender may accept a deed in lieu of foreclosure. Your lender may first require that you try to sell your home; most lenders would rather have you sell the house than have to sell it themselves, even if this results in a "short sale", where the lender realizes a loss. Since that also doesn't involve the courts, it may goes much faster and less expensively than a foreclosure. It's worth noting that FHA-backed loans have special rules, and if you meet HUD's guidelines, your FHA lender will accept your offer of a deed in lieu of foreclosure.
Avoiding Foreclosure: A Better Outcome
One advantage to a deed in lieu settlement is that on your credit report, a deed in lieu isn't quite as detrimental as a foreclosure. In addition, if forced to foreclose, your lender will likely try to pass the high legal costs of that process on to you. You could be forced to surrender other assets to your lender if you owe more than the property fetches in a foreclosure sale. Finally, a deed in lieu is negotiable. You may be able to get concessions from your lender for not dragging out a foreclosure proceeding -- concessions like a more favorable report to credit bureaus.
Negotiation of a Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is voluntary, and that means there is room for negotiation. You should have a real estate attorney represent you. Skilled negotiation is critical -- if you make a mistake, you could end up with the lender chasing after you for fees and deficiencies, in addition to a getting a full-blown foreclosure mark on your credit history. For you, the best possible outcome would be a complete walk-away with your credit report showing "paid-satisfactory" or at least "paid-settlement." The lender's representatives may argue that they can't do this, but in fact they can.
What if Your Lender Says No?
Talk to your lender's loss mitigation department about a short sale. This involves selling your home for less than the balance of the mortgage--ideally, with the lender accepting the proceeds as payment in full. Again, the idea is to keep a foreclosure off your credit report and make a clean break. If your back is truly against the wall, speak to a bankruptcy attorney. In many cases, you can protect certain assets -- like retirement funds -- from lenders suing for any balance which may be due.