What is a Deed In Lieu of Foreclosure?
A “deed in lieu of foreclosure” or a “deed in lieu” is a document that conveys title to real estate to a lender when a borrower can no longer make payments pursuant to the agreed-upon loan documents. Instead of the lender initiating a foreclosure action to recover the amount that is owed, the parties can agree on terms which ultimately results in a transaction in which the borrower conveys the title to the real estate back to the lender via a deed in lieu of foreclosure. A successful deed in lieu transaction can result in the borrower being relieved from personal liability in relation to a debt, without having to go through the foreclosure process.
Advantages to A Deed In Lieu of Foreclosure
There are several advantages of a deed in lieu of foreclosure for a borrower. First, a deed in lieu is an efficient option for a borrower to be relieved of personal liability for a debt because the lender will typically pay for the majority of all expenses associated with the transfer of the real estate, such as taxes, title insurance, and recording costs. Second, a deed in lieu avoids the delays, expenses, and emotional turmoil that often come with a foreclosure action. Third, a borrower can have the ability to negotiate and retain certain property rights (i.e. a right of first refusal, a lease back, an option to purchase, etc…) all while the borrower releases her/his personal liability on the mortgage debt.
There are also several benefits of a deed in lieu of foreclosure for a lender. First, a lender can avoid the cost, time, and other negative aspects of an adversarial foreclosure action. Second, a lender can gain immediate ownership rights to the property, which can include the ability to control all operations and derive all income generated by the property. Third, a lender can avoid other risks associated with a foreclosure action, such as the borrower filing for bankruptcy.
Disadvantages to A Deed In Lieu of Foreclosure
All considered, there are some disadvantages of a deed in lieu. For borrowers, not all property owners qualify for a deed in lieu. If a property has other mortgages or liens on it, lenders are often reluctant to agree to a deed in lieu. Also, a deed in lieu of foreclosure may result in tax implications for a borrower, and can still lower the borrower’s credit score. For lenders, there are various risks to consider when contemplating a deed in lieu (particularly when considering a partial conveyance), a deed in lieu may not maximize a lender’s revenue, and a deed in lieu does not extinguish junior liens or encumbrances.
To conclude, entering into a mortgage is a tremendous decision with tremendous consequences. If you have defaulted, or are potentially going to default on a mortgage, it is in your best interest to consult with experienced legal counsel to explore your options, whether it be a deed in lieu of foreclosure or otherwise. The attorneys at Ball & McCann, P.C. have experience with negotiating all aspects of a deed in lieu transaction, and we are happy to discuss a plan of action that is best for you.