What is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is an agreement between the borrower and the lender to transfer ownership of the property without going through the normal foreclosure process. With a deed in lieu of foreclosure, borrowers may be able to avoid problems that could come up during the foreclosure process. The benefit for the lender is a deed in lieu is usually quick (assuming no title issues), therefore reducing both time and costs.
Both the lender and borrower need to understand their options and the consequences of each option.
When a property is in default, both the lender and the borrower need to think about their options. Rarely do both sides get the same things out of a deal. This means that both the borrower and the lender should get good legal advice before starting any process.
Lenders can be very cunning when it comes to promoting a deed in lieu of foreclosure.
Accepting a deed in lieu of foreclosure can help lenders avoid the costs of foreclosure and a process that could take a long time. Lenders have always wanted to keep the option of foreclosing on a property after a deed-in-lieu transaction has been completed if there are subordinate liens. Smart lenders usually do this by having a different subsidiary take ownership of the property, as long as the current loan is still in place, and making sure that the loan stays in place in the paperwork (this is called a “non-merger provision”).
A conveyance in lieu of foreclosure may have drawbacks.
For instance, if a loan has recourse, the lender may have some deficiency claims (meaning that they can sue the borrower). On the other hand, the property’s value may go down because of the foreclosure process. In Arizona, it takes at least 91 days for a non-judicial foreclosure and nine to twelve months for a judicial foreclosure. If someone files for bankruptcy, both deadlines will be extended.
A deed in lieu of foreclosure, a trustee’s sale, or a deed in lieu will always be on a borrower’s record.
But this is a foreclosure, and it will show up on the borrower’s credit report. This will make it harder for the borrower to get a loan for a new home in the near future. Most creditors think of a deed in lieu of foreclosure as a “foreclosure.” Usually, potential lenders would ask if the borrower has ever been involved in a foreclosure, trustee’s sale, or deed in lieu of foreclosure. So, a borrower’s record will always show a deed in lieu of foreclosure, foreclosure, or trustee’s sale.
The borrower on the subordinate lien will have a deed in lieu of foreclosure as well as a separate foreclosure on their credit record.
A deed in lieu of foreclosure can be a good idea in some situations. It is very important for both the borrower and the lender to get good legal advice before signing the agreement.