Foreclosure is the last thing you want when you are already having trouble in life. There is a multitude of reasons you may find yourself in financial trouble bad enough to warrant bankruptcy, a short sale, or foreclosure. The situation may seem hopeless, but there may be an option you are unaware of. In some cases, you may be able to sign over the deed to your house to the lender and release yourself from the burden of the debt.
A Deed in Lieu
Rather than losing your house through short sale or foreclosure, you may be able to convince the bank to take your deed. Some banks are not willing to let you short sell. In this case, while you may not feel compelled to help the bank, you could free yourself of the debt by giving them the deed. While this may be a good option for many, it is far from a sure thing.
A deed in lieu of foreclosure is not available in every situation.
Why Would a Bank Reject This Proposal?
Well, for starters, the bank may receive federal benefits to mitigate the damage of a foreclosure or short sale. In addition:
- A bank may make more money (or lose less) by foreclosing on the home and auctioning it;
- If the borrower has any judgments or tax liens against the property, the bank will inherit them when they assume the deed;
- The Prepayment PSA may prohibit a deed in lieu of foreclosure altogether.
Of course, this type of agreement does come with negatives.
You May Not Want to Pursue a Deed in Lieu
There are several downsides to this agreement beyond losing the home to a bank.
- Your credit report may take a beating equal to that of a foreclosure. These bruises can last up to seven years;
- You may be unable to buy a new home for 4 years. For reference, you can usually purchase a new home within 2 years of a short sale;
- The bank assumes all liability included in the home.
In many states, there are not laws called “anti-deficiency laws”. These laws prevent mortgage lenders from holding the borrower responsible for the deficiency after a deed in lieu of foreclosure transaction is complete. “Deficiency” in this case refers to the difference between the fair market value of the home and the amount owed to the lender. To avoid this, be sure to include in the agreement that the transaction completely satisfies any debt owed to the lender and prohibits any further debt collection action.
If you are facing foreclosure, short sale, or bankruptcy, you need help the help of a licensed and skilled attorney. Elias Dsouza has been helping the citizens of Broward County, Plantation, and many other areas of Florida for over 15 years. Contact Elias for a free consultation.