Is a deed in lieu of foreclosure a viable alternative to foreclosure? I don't usually spend a lot of time discussing the deed in lieu of foreclosure option, because it isn't used very often for homeowners in Washington State, but several people have asked me about it recently, so I thought it would be something worth explaining.
With a deed in lieu of foreclosure, you give your house to the bank instead of going through the complete foreclosure process. This may seem like an easy way out, but it often isn't as easy as it sounds.
First, let's look at the primary advantage for the homeowner. If the bank agrees to accept the deed in lieu of foreclosure and agrees in writing not to pursue a deficiency judgment or put a foreclosure on your credit report, this could be a way to get out of the house and out from under the mortgage without the bank foreclosing.
However, there are a few things that you would need to consider:
- The bank will usually require that your house is listed for sale by a real estate agent for at least 60-90 days. They want to see that you’ve made an effort to sell it first. If there isn’t that much time before the foreclosure auction, this option may not be available to you.
- If you don't have enough equity, the bank may pursue you for more money.
- The bank may still record a foreclosure on your credit report.
- The bank will generally not approve a deed in lieu of foreclosure if there are any other liens against the property, including a second mortgage.
- The bank will usually require that the property is owner-occupied, not abandoned or an investment property. However, exceptions may include vacating the property due to job loss, job transfer, divorce, or death.
- You must be at least 31 days delinquent on your mortgage.
- You will usually need to prove a hardship (income reduction or increase in living expense).
- You would have to move immediately.
- There may be income tax consequences.
- You’ll most likely be on your own when negotiating with the bank, because the bank will rarely compensate an attorney or real estate agent for assisting you as they would in a short sale.
A deed in lieu of foreclosure is most beneficial for the lender in states where the foreclosure process is very long (usually in judicial foreclosure states where the lender is required to file a lawsuit against the borrower in order to foreclose). When foreclosure is a very long and expensive process for the lender, they would benefit by getting the property back several months earlier than they would have by foreclosing, and most likely in better condition (especially if the house is vacant). This would typically save them thousands of dollars in legal and administrative fees, and allow them to sell the property as a bank-owned property to get it off their books sooner.
Washington State is a non-judicial foreclosure state, and the foreclosure process only takes a few months. The foreclosure auction, or trustee sale, can be scheduled for roughly six months after the date of default, so the lender doesn’t have as much to gain from a deed in lieu of foreclosure. Also, lenders typically lose more money by taking a house back and selling it as a bank-owned property than they would from a short sale, which is one reason why they will usually require that you attempt a short sale first.
In some cases, the deed in lieu of foreclosure is a viable option. However, by knowing all of your options, you'll be able to make an informed decision and know whether this option is best for you.
Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.
Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
Deed In Lieu Of Foreclosure - Is It A Viable Alternative?