One question that I am often asked: Is Deed in Lieu as bad as foreclosure?
First, allow me to explain what a deed-in-lieu of foreclosure is. What is deed-in-lieu? The Borrower transfers ownership VOLUNTARILY to the Lender to satisfy a loan that is in default.
It is a common misconception that DIL is just as bad as foreclosure. As with any otehr alternative to foreclosure, there are advantages and disadvantages for the Borrower, of this voluntary surrender.
Advantages of Deed-In-Lieu include:
- The Borrower is released from most or all personal indebtedness associated with the loan
- Public notice of foreclosure proceedings are avoided
- The amount of the deficiency is reduced
- Starts the clock to buy again much faster than a foreclosure. Most lenders require 3 years pass from the time of a Deed-in-Lieu or Foreclosure. By avoiding foreclosure proceedings you are starting the clock immediately versus 6 months or a year or longer from now to be able to buy a home again
Contact a real estate attorney to learn about any consequences associated with a deed-in-lieu prior to requesting one from your lender. I think it is important that you understand how your credit rating will be affected. Deed-in-lieu and foreclosure are reported the same by FICO. However, with a deed-in-lieu you may never fall behind on payments. Therefore, the effects may be less damaging. On the other hand, I advise my clients to worry about survival and finances first and FICO scores last. Please keep that in mind when faced with the loss of your home.
Advantages of a deed-in-lieu for the Lender include:
- Reduces time and cost of foreclosure proceedings
- Reduces risk of Borrower vandalizing the property
- There are additional advantages to the Lender if the Borrower files Bankruptcy
Some lenders will not agree to DIL if the debt exceeds the current fair market value of the property. Some lenders will agree because they will end up with the property anyways. It is important to note that the Borrower must initiate the deed-in-lieu. The lender will not, because of the requirement that it be voluntary. Seek legal counsel when pursuing a DIL. A Realtor is not equipped to advise whether or not you should pursue a deed-in-lieu! Far too often I have had homeowners tell me that an agent told them that deed-in-lieu of foreclosure was equal to foreclosure. Do your homework home owners.
Consult a Real Estate Attorney regarding Deed-In-Lieu.