Request a Deed in Lieu (Mortgage Release)

No homeowner, on the signing day for a new home, imagines they will encounter a foreclosure.

However, life often gets in the way of our best-laid plans. Things happen that are beyond your control, such as an economic downturn or personal financial emergency. These things can make you undergo the distressing process of losing your home.

The foreclosure process can be long, embarrassing, and severely damaging to your savings, assets, and credit. It's a scary situation.

However, there is another option for some homeowners – requesting a deed in lieu (DIL) or mortgage release.

We’ll explain what mortgage release is, how it works, its benefits and drawbacks, and how to evaluate whether one is right for you.

How a Deed in Lieu Works

A deed in lieu is when you voluntarily transfer your home’s title to your mortgage company in exchange for canceling your debt. (CFPB)

If you’re facing foreclosure, a mortgage release can protect you from a formal auction process. However, there are still weighty repercussions to your credit and your prospects for getting a home loan in the near future.

Typically, you must try to sell your home for its fair market value for at least 90 days before a mortgage company will consider a deed in lieu. (USDA)

• The first step to getting approval for a mortgage is to gather your basic financial documents: bank statements, pay stubs, and mortgage statements.
• Reach out to the servicer and request a loss mitigation application. You will need to fill out and submit the application along with documents about income and expenses.
• If you're approved for a mortgage transfer, the bank will send you 2 documents to sign: a deed that transfers property ownership to the bank and an estoppel affidavit. This affidavit sets out the terms of the agreement and will include a provision that you are acting freely and voluntarily. The affidavit might also include clauses specifying if the transaction completely satisfies the debt or whether the lender has the right to seek a deficiency judgment against you.
• Prepare your property for move-out and make arrangements for a new home. You may need to turn over the property in a certain condition or the deal will be canceled. Ideally, you will leave your home in suitable shape to go on the market.

Who Is This Option Good/Not Good For?

A mortgage release may not be an option if you have used your home as collateral on other loans and expect your current financial hardship to be long-term. (FTC)

Don’t consider a deed-in-lieu of foreclosure if you haven’t exhausted all other options and don’t have a lot of equity in the home.

Does My Lender Have to Accept A Deed In Lieu Of Foreclosure?

Your lender isn’t obligated to accept a deed in lieu of foreclosure from you. There are many reasons they might not choose to move forward with it, like if you have any liens or judgments on your home or if your home has depreciated in value.

Liens and judgments make it harder to sell your property and get the appropriate amount of proceeds back for the lender after splitting between the affected parties. Lenders are also less likely to accept a mortgage transfer if they believe your property is not in the best shape.

Should I be Worried About Deficiency Judgments Following Deeds in Lieu?

With a mortgage transfer, the deficiency is the difference between the total mortgage debt and your home’s fair market value.

Typically, completing a deed in lieu will release you from all obligations and liability—but not always.

Most states do not have a law that stops lenders from obtaining a deficiency judgment following a mortgage transfer.

To avoid a deficiency judgment, ensure the agreement expressly states that the transaction fully satisfies the debt.

DIY Vs. Hiring a Real Estate Attorney

Getting a mortgage release is a legal process, and it may be a good idea to have a real estate attorney help you. They will understand the agreement's provisions and what you will and won’t be responsible for.

Having a professional negotiate on your behalf could save you money above and beyond whatever legal fee is necessary.

Works Cited

"CFPB." 4 9 2020. What is a deed-in-lieu of foreclosure? <https://www.consumerfinance.gov/ask-cfpb/what-is-a-deed-in-lieu-of-foreclosure-en-291/>.

"Experian." 29 12 2019. How Does a Foreclosure Affect Credit? <https://www.experian.com/blogs/ask-experian/how-does-a-foreclosure-affect-credit/>.

"Fannie Mae." 12 10 2022. Incentive Payments to Assist a Borrower with Relocation Expenses. <https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-D-Providing-Solutions-to-a-Borrower/Subpart-D2-Assisting-a-Borrower-Who-is-Facing-Default-or/Chapter-D2-3-Fannie-Mae-s-Home-Retention-and-Liquidation/Section-D2-3-3-Home-Liquidation-Workout-Op>.

"FTC." 6 2021. Trouble Paying Your Mortgage or Facing Foreclosure? <https://consumer.ftc.gov/articles/trouble-paying-your-mortgage-or-facing-foreclosure#Selling:~:text=A%20deed%20in%20lieu%20of%20foreclosure%20may%20not%20be%20an%20option%20if%20you%E2%80%99ve%20used%20your%20home%20as%20collateral%20on%20other%20loans%20>.

"HOW TO AVOID FORECLOSURE." n.d. HUD. 13 11 2022. <https://www.hud.gov/sites/documents/22775_PA426H.PDF>.

"IRS." 10 8 2021. Real Estate Property Foreclosure and Cancellation of Debt Audit Technique Guide. <https://www.irs.gov/pub/irs-pdf/p5550.pdf>.

"USDA." 13 11 2022. Avoid Foreclosure: Pre‐Foreclosure Sale & Deed In Lieu to the Rescue! <https://www.rd.usda.gov/files/RD-SFH-AvoidForeclosureNotes.pdf>.

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