Tips & Tricks
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Request a Deed in Lieu (Mortgage Release)

No homeowner, on the signing day for a new home, imagines they will encounter a foreclosure.

No homeowner, on the signing day for a new home, imagines they will encounter a foreclosure.

However, life often gets in the way of our best-laid plans. Things happen that are beyond your control, such as an economic downturn or personal financial emergency. These things can make you undergo the distressing process of losing your home.

The foreclosure process can be long, embarrassing, and severely damaging to your savings, assets, and credit. It's a scary situation.

However, there is another option for some homeowners – requesting a deed in lieu (DIL) or mortgage release.

We’ll explain what mortgage release is, how it works, its benefits and drawbacks, and how to evaluate whether one is right for you.

How a Deed in Lieu Works

A deed in lieu is when you voluntarily transfer your home’s title to your mortgage company in exchange for canceling your debt. (CFPB)

If you’re facing foreclosure, a mortgage release can protect you from a formal auction process. However, there are still weighty repercussions to your credit and your prospects for getting a home loan in the near future.

Typically, you must try to sell your home for its fair market value for at least 90 days before a mortgage company will consider a deed in lieu. (USDA)

  • The first step to getting approval for a mortgage is to gather your basic financial documents: bank statements, pay stubs, and mortgage statements.
  • Reach out to the servicer and request a loss mitigation application. You will need to fill out and submit the application along with documents about income and expenses.
  • If you're approved for a mortgage transfer, the bank will send you 2 documents to sign: a deed that transfers property ownership to the bank and an estoppel affidavit. This affidavit sets out the terms of the agreement and will include a provision that you are acting freely and voluntarily. The affidavit might also include clauses specifying if the transaction completely satisfies the debt or whether the lender has the right to seek a deficiency judgment against you.
  • Prepare your property for move-out and make arrangements for a new home. You may need to turn over the property in a certain condition or the deal will be canceled. Ideally, you will leave your home in suitable shape to go on the market.

Pros of a Deed in Lieu

  • You don't have to take responsibility for selling your house.
  • A deed in lieu leaves a LESS negative impact on your credit score. (HOW TO AVOID FORECLOSURE) The drop might be anywhere from 50-125 points or higher. Compared to a foreclosure, where the drop is anywhere from 85-160 points, it means the latter could take a lot of time to rebuild your credit. Also, in some circumstances, you may be able to secure a home loan sooner. The waiting period on a conventional mortgage after mortgage release is 4 years, compared to 7 years after a foreclosure. (Experian)
  • There is less publicity to a deed in lieu. Foreclosures are associated with a public notice of foreclosure proceedings on your door. It may be better to surrender your home to the bank instead of enduring the embarrassing process.
  • You may be able to avoid more financial loss. With a foreclosure, depending on where you live, your lender may have the right to demand the difference between the proceeds from the sale and the money you still owe on the balance. By willingly turning your home over in a deed in lieu, the lender may be more willing to waive the remaining debt.
  • You might be able to get moving assistance. In a "cash for keys" arrangement, your bank will give you money to help you find a new living arrangement (up to $3,000 in some cases) (Fannie Mae). Exactly how much you’ll receive depends on a few factors, such as your history of past-due payments and any built-up equity.

Cons of a Deed in Lieu

  • You can’t use this option if there are other liens on the property, such as tax liens, second mortgages, or judgments from creditors.
  • This option is still a significant hit to your credit. The potential for a 125-point dip in your credit score is not something to be taken lightly.
  • Any forgiven debt could be taxable in the same way it might in a short sale. (IRS) While the Mortgage Forgiveness Debt Relief Act relieves homeowners from having to pay taxes on the part of the debt that’s forgiven with a mortgage release, it’s unknown if the law will be extended beyond 2025. Consult a tax advisor if you’re unsure how to proceed.
  • You will be unable to purchase another home for up to 4 years. The VA, FHA, and USDA treat a mortgage transfer the same way they would a foreclosure. The waiting period for a VA loan is 2 years, while it’s 3 years if you qualify for a USDA or FHA loan.

Who Is This Option Good/Not Good For?

A mortgage release may not be an option if you have used your home as collateral on other loans and expect your current financial hardship to be long-term. (FTC)

Don’t consider a deed-in-lieu of foreclosure if you haven’t exhausted all other options and don’t have a lot of equity in the home.

Does My Lender Have to Accept A Deed In Lieu Of Foreclosure?

Your lender isn’t obligated to accept a deed in lieu of foreclosure from you. There are many reasons they might not choose to move forward with it, like if you have any liens or judgments on your home or if your home has depreciated in value.

Liens and judgments make it harder to sell your property and get the appropriate amount of proceeds back for the lender after splitting between the affected parties. Lenders are also less likely to accept a mortgage transfer if they believe your property is not in the best shape.

Should I be Worried About Deficiency Judgments Following Deeds in Lieu?

With a mortgage transfer, the deficiency is the difference between the total mortgage debt and your home’s fair market value.

Typically, completing a deed in lieu will release you from all obligations and liability—but not always.

Most states do not have a law that stops lenders from obtaining a deficiency judgment following a mortgage transfer.

To avoid a deficiency judgment, ensure the agreement expressly states that the transaction fully satisfies the debt.

DIY Vs. Hiring a Real Estate Attorney

Getting a mortgage release is a legal process, and it may be a good idea to have a real estate attorney help you. They will understand the agreement's provisions and what you will and won’t be responsible for.

Having a professional negotiate on your behalf could save you money above and beyond whatever legal fee is necessary.

Works Cited

"CFPB." 4 9 2020. What is a deed-in-lieu of foreclosure? <>.

"Experian." 29 12 2019. How Does a Foreclosure Affect Credit? <>.

"Fannie Mae." 12 10 2022. Incentive Payments to Assist a Borrower with Relocation Expenses. <>.

"FTC." 6 2021. Trouble Paying Your Mortgage or Facing Foreclosure? <>.

"HOW TO AVOID FORECLOSURE." n.d. HUD. 13 11 2022. <>.

"IRS." 10 8 2021. Real Estate Property Foreclosure and Cancellation of Debt Audit Technique Guide. <>.

"USDA." 13 11 2022. Avoid Foreclosure: Pre‐Foreclosure Sale & Deed In Lieu to the Rescue! <>.

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Custom insight on avoiding foreclosure for your situation.

Information to reduce the stress in your life, in minutes, at no charge to you.

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