The COVID-19 pandemic caused significant economic damage that will take years to calculate and decades to repair. In response, the United States government created several loan modification programs to help people stay in their homes despite their mortgage debt and prevent an unprecedented number of foreclosures.
These programs ended in the summer of 2021, and since then, the total number of foreclosures has increased dramatically due to financial hardship.
If you fall behind on your bills, it's essential to avoid foreclosure during your repayment plan, as it can seriously impact your credit. Although most government programs have ended, some options are available to help limit foreclosure damage or even allow you to stay in your home while catching up on your bills to your loan servicer.
A deed in lieu of foreclosure may not be ideal, but it is a much better option than going through the lengthy and expensive foreclosure process and losing ownership of the property.
A deed in lieu of the foreclosure process is an official agreement made between a mortgage lender and a homeowner where the property's title is exchanged in return for relief from the loan debt. The terms of the agreement are that the title of the property will be transferred to the mortgage lender by request instead of a court order. Since the borrower will turn over the deed to the mortgage creditor from the mortgagee, there will be no need to enter into the process of foreclosure, saving time, money, and stress for both parties.
Although a deed in lieu of foreclosure is preferable to a foreclosure, it does come with some consequences. The largest downside is that a deed in lieu of foreclosure will appear on the homeowner's credit report for four years. There may also be specific terms and conditions included in the agreement that will require fees to be paid or actions to be taken. It’s important to remember that a deed in lieu of foreclosure is a compromise made by a lender, and they are under no obligation to agree to one. That allows them to set favorable terms that might get costly for the homeowner.
Seeking a deed in lieu of foreclosure isn’t an ideal situation and should only be used as a last resort in dire economic hardships that will lead to foreclosure. The goal of a deed in lieu of foreclosure is to speed up a foreclosure process and limit its damage.
They should only be used when a foreclosure is unavoidable. For example, if a homeowner knows that they will be unable to make their mortgage payments in the future, then they might want to request a deed in lieu of foreclosure.
Losing your job, racking up expensive medical bills, or experiencing a death in their immediate family are all examples of reasons why a foreclosure might be coming soon. Instead of waiting out the process and dealing with the financial consequences, a deed in lieu of foreclosure will make it easier to move on from the amount of the deficiency and rebuild financially.
Another common reason that a deed in lieu of foreclosure is sought out is when a homeowner is “underwater” with their mortgage. This is the term used to describe a situation where the principal remaining on a mortgage is higher than the overall value of the home or property. A deed in lieu of foreclosure can help prevent wasting money by paying off a loan that costs more than the property is worth.
It’s important to know what a foreclosure is and why it’s so important to avoid it when possible. Foreclosure is the term for the final stage of a legal process where a mortgagor seizes a property once the loan has entered a default status due to a lack of payments.
Nearly every mortgage agreement will have a clause where the purchased home or property can be used as collateral. That means that if the mortgage isn’t being repaid according to the terms and conditions of the mortgage, the lender will legally be able to seize the property. The homeowner’s possessions will be removed from the home, and the lender will attempt to resell the property to recover their mortgage losses.
There are no fines or criminal charges brought upon the homeowner if they default on their mortgage, but that doesn’t mean there are no consequences. Besides being evicted from their home, a foreclosure will appear on the homeowner's credit report for seven years. It will be extremely difficult to get approved for another mortgage with a foreclosure on your credit report. Low credit scores will lead to higher interest rates for loans and credit cards to be approved.
The exact process of foreclosure varies from state to state and can be different depending on the specific terms of the mortgage. However, the process will generally look similar to this timeline:
There are three different types of foreclosure possible depending on the state that you live in. Foreclosures will usually take place between three to six months after the first missed mortgage payment.
The three types of foreclosures are known as judicial, statutory, and strict:
A deed in lieu of foreclosure is basically a method of speeding up the foreclosure process for a reduced financial and credit penalty. A deed in lieu of foreclosure is normally a more peaceful transition of homeownership and includes several benefits for both parties. For example, a foreclosure will usually require the court systems to get involved, which will lead to legal fees for the lender. By accepting a deed in lieu of foreclosure, they will get the deed to the property back and save some money and time in the process.
For a homeowner, the foreclosure process can result in them being forcefully removed from the property by the local police department, in addition to a penalty on their credit lasting nearly twice as long. The homeowner will be required to leave home in both scenarios, but a deed in lieu of foreclosure will only impact their credit for four years and does not require a foreclosure attorney. A deed in lieu of foreclosure is definitely the better option than the seven-year waiting period during which a foreclosure will impact credit.
A deed in lieu of foreclosure is generally preferable to both the borrower and the lender. There are plenty of benefits for both parties involved with a defaulted mortgage, including:
Although better than experiencing a foreclosure, there are still a few downsides to a deed in lieu of foreclosure. A deed in lieu of foreclosure will still result in the following consequences:
A deed in lieu transaction will typically provide several benefits for a mortgage lender, and they are inclined to accept them. However, they are under no legal obligation to even consider them and won’t accept them unless it’s beneficial for them to do so.
A lender might deny a lieu of foreclosure for the following reasons:
Mortgage lenders won’t accept a deed in lieu of foreclosure unless it provides them with more benefits than a foreclosure would. Meeting their demands for an agreement proposal can often leave the borrower in a less than favorable position.
Before creating a deed in lieu of a foreclosure proposal, these are a few other options that can help avoid a foreclosure:
Refinancing a mortgage is basically replacing a current mortgage with a new loan that comes with a lower interest rate. Lower interest rates on mortgages can save a lot of money in the short term and long term. It’s common for the credit scores of a homeowner to improve over time, and they might have higher scores in the present than they did in the past. A lower interest rate will make it easier to make monthly payments and pay off the mortgage faster with your monthly income.
If the homeowner owes more money than the home is worth, they can request the lender to place the difference into a forbearance account. The money placed into a forbearance account would be due whenever the mortgage is paid off, but it wouldn’t have accumulated any interest over time.
This tactic is most common when the property value in the area around the home has declined. A short sale will involve selling a home for less than the total remainder of the mortgage. It operates the same way as a traditional home sale, only the price is left that remains on the mortgage.
A lender would need to grant permission for sale to occur and might create their own stipulations. For example, they might request that the difference between the sale and mortgage be paid to them. It might take some time to repay the difference, but it would prevent foreclosure on the property and all the consequences that come with it.
Balance Homes provides co-investment opportunities to homeowners to help them avoid foreclosure and stay in their homes while also typically saving them money each month through debt consolidation. It might sound too good to be true, but it’s pretty simple:
It will take at least seven years for a foreclosure to fall off your credit report. You probably won’t get another mortgage during that time, and it might be difficult to find a place to live without the help of a housing counselor. A deed in lieu of foreclosure is much softer on your credit, but it can still come with several consequences. Before proposing a deed in lieu of a foreclosure agreement, you might want to consider alternative options.
Short selling your house or refinancing the mortgage can help you stay in your home and get back on track financially, but it will require the lender to approve either event. Like the ones offered by Balance Homes, a co-investment opportunity can help you get caught up on your mortgage and improve your finances. Get a free proposal today to see your options for a co-investment opportunity.