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It is vital that you seek legal advice from a qualified attorney on your individual situation. It will almost certainly cost you less to seek advice before acting than it will to repair your mistakes.

WHAT IS A DEED IN LIEU OF FORECLOSURE?

ALSO REFERRED TO AS A DEED IN LIEU or DIL

Foreclosure is sometimes the best option for the lender.

foreclosureWhen a secured debt on real property is in default, lenders and borrowers (homeowners) have the opportunity to work together to address the default. If the lender and borrower can work together, the simplest alternative may be to let the property go through foreclosure, which will save the borrower time and allow the foreclosure purchaser (perhaps the lender) to take over the property free of all junior liens.

A conveyance in lieu of foreclosure may have drawbacks.

For example, if a loan has recourse, the lender may have some deficiency claims (meaning that they can sue the borrower). Alternatively, the value of the property depreciates during the foreclosure process. In Arizona, a non-judicial foreclosure takes at least 91 days and a judicial foreclosure takes at least nine to twelve months. If bankruptcy is filed, 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.

In some cases, the lender and the borrower will try to reach an agreement on a deed in lieu of foreclosure. A deed in lieu of foreclosure is an agreement between the borrower and the lender to transfer title to the property without going through the regular foreclosure process. A deed in lieu of foreclosure may help borrowers escape issues that might arise from foreclosure procedures. True – this is a foreclosure, and it will appear on the borrower’s credit reports, affecting his or her ability to finance a new home in the near future. Most creditors consider a deed in lieu of foreclosure to be a “foreclosure.” Typically, potential lenders would inquire if the borrower has ever been involved in a foreclosure, trustee’s sale, or deed in lieu of foreclosure. As a result, a deed in lieu of foreclosure, foreclosure, or trustee’s sale will always be on a borrower’s record.

deed in lieuLenders can be very cunning when it comes to promoting a deed in lieu of foreclosure.

Accepting a deed in lieu of foreclosure can assist lenders avoid foreclosure expenses and potentially protracted foreclosure proceedings. Lenders have traditionally wanted to keep the possibility of foreclosing on a property after a deed in lieu transaction is completed if there are subordinate liens. Smart lenders usually achieve this by having a different subsidiary assume title to the property, subject to the current loan, and ensuring that the loan survives in the paperwork (a ‘non-merger provision’).

The borrower on the subordinate lien will have a deed in lieu of foreclosure as well as a separate foreclosure on their credit record.

In some cases, a deed in lieu of foreclosure can be advantageous. Before entering into the agreement, it is critical that both the borrower and the lender seek competent legal advice.

DEEDS IN LIEU: WHERE THE GRANTEE IS THE SENIOR LIENHOLDER, THE MERGER DOCTRINE DOES NOT APPLY.

The highlighted definitions are from Wikipedia: A deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.

bankruptcyBoth the borrower and the lender gain benefits from a deed in lieu of foreclosure. The primary benefit to the borrower is that it relieves him or her of most, if not all, of the personal debt associated with the defaulted loan. In addition, the borrower avoids the public scrutiny of a foreclosure case and may be offered more favorable terms than in a traditional foreclosure. A lender benefits from a reduction in the time and cost of a repossession, as well as a lower chance of borrower retaliation (metal theft and vandalism of the property prior to sheriff eviction) and additional benefits if the borrower files for bankruptcy later.

A deed in lieu is a less appealing choice for the lender if there are any junior liens. The lender will most likely not want to take on the junior liens’ liabilities from the property owner, thus it will prefer to foreclose in order to clear the title.

The indebtedness must be secured by the real estate being transferred in order for it to be considered a deed in lieu of foreclosure. Both parties must agree to the deal voluntarily and in good faith. The total compensation in the settlement agreement must be at least equivalent to the fair market value of the property being transferred. If the borrower’s outstanding debt exceeds the property’s current market value, the lender may refuse to proceed with a deed in lieu of foreclosure. Other times, lenders will accept because they will eventually own the home and the foreclosure procedure is expensive for them.

Because the instrument must be voluntary, lenders will often refuse to act on a deed in lieu of foreclosure unless they get a written offer of such a conveyance from the borrower that expressly says that the offer to enter into is given freely. This will put in place the parol evidence rule, which will safeguard the lender from any subsequent claims that the lender acted in bad faith or forced the borrower into the settlement. After then, both parties can start negotiating a settlement.

deed in lieuNeither the borrower nor the lender is normally obligated to proceed with the deed in lieu of foreclosure until a final agreement is made, but you should consult with an experienced attorney to understand your rights and responsibilities.

Edits from Deeds in lieu: merger doctrine does not apply where grantee is senior lienholder, By Benzion J Westreich & Scott C Cutrow, Katten Muchin Rosenman LLP  (The full article was first published by the International Law Office.) 

Read the full article….