Seattle Real Estate Blog by David Monroe

Deed In Lieu Of Foreclosure - Is It A Viable Alternative?

Handing Over HouseIs 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:

  1. 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.
  2. If you don't have enough equity, the bank may pursue you for more money.
  3. The bank may still record a foreclosure on your credit report.
  4. 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.
  5. 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.
  6. You must be at least 31 days delinquent on your mortgage.
  7. You will usually need to prove a hardship (income reduction or increase in living expense).
  8. You would have to move immediately.
  9. There may be income tax consequences.
  10. 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.


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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?

Comment balloon 11 commentsDavid Monroe • October 21 2009 07:18PM

Comments

Evening David,  This is a very well thought out and presented review of this option.  Not sure why more distressed sellers don't know about it.

Posted by Bill Gillhespy, Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos (16 Sunview Blvd) about 9 years ago

Hi David, This is an informative post. Not always the best option that is for sure. I hope this is helpful for your clients that have asked. I think they may just decide to let the foreclosure happen or try to short sell.

Posted by Stephanie Reynolds, East County San Diego Homes 619-838-4408 (Integrity First Financial Group, Inc. ) about 9 years ago

Hi David, Thanks for outlining this process. I've never been involved in one, only brief discussions occasionally, but this will be handy in the future. Thanks for taking the time to post it.

Posted by David Jirasek, ALC, CCIM (Jirasek Realty) about 9 years ago

Your article was a big help David,

Deed in Lieu seemed like a good choice until we got to the owner-occupied requirement.

We will stick with the short sale on my Urban Farm listing.  Thank you.

Posted by Jeanne Judd over 7 years ago

Great explanation of the requirements.  Forwarded this to a client today. 

Posted by David Mordue - NMLS 120640 Wells Fargo - Kennewick (509) 736-2618 (Wells Fargo Home Mortgage) over 7 years ago
We did a DIL in CA and it was both good and bad for us. Better for our credit score as we didn't have all the missed payments until foreclosure, HOWEVER, it still shows on your credit report as a MAJOR DEROG and effected our current credit cards and revolving accounts. Open credit was reduced to within a few dollars of our current balances lowering our credit lines in turn effected our debt ratio and created other issues with our credit. The biggest benefit to us was that we lived in CA and it is a single action state. We were allowed to walk away with no fees and/or tax liabilities. Instead of having to wait for 7-10 years, we were told to wait for 3-4 yrs to apply for another home loan. We just recently hit the three year mark and applied for another home loan. We were pre approved for a reasonable amount and are out looking for another home. Not sure what will happen during tighter scrutiny of our finances, but DIL shows as NO MISSED PAYMENTS and a ZERO balance being owed.
Posted by Kevin almost 7 years ago

Although I perfer working with the banks and do short sales this is a better alternative then foreclosure.

Posted by Charles Stallions, 800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl. (Charles Stallions Real Estate Services ) almost 6 years ago

Looks like you covered a lot of questions a distressed seller might have. Great explanation and I would love to re-blog it.

Posted by Mike Baltierra, Full Service at Your Service Realtor-Corona CA (Rise Realty ) almost 5 years ago
We have been working with our mortgage company for 2 week shy of a year for a modification. All of a sudden DIL is being discussed. when we have done everything and more to try to et this to go through. We are 1 month behind. we were 3 but we had been able to make up 2 after robbery. We've also had 4 officers. Was that by design just to keep us off balance? Knowing that Washington takes longer to vacate a house?
Posted by Tawna almost 5 years ago

Tawna, your experience is pretty much par for the course on loan modifications.  Because you're only one month behind on your mortgage and continue to make payments, your mortgage company doesn't have much incentive to move things forward any faster.  They're likely to just keep collecting payments from you and keep delaying the loan modification process, because that makes them more money.

There may be other reasons for the delays as well, but just remember that the bank's goal is to either make more money or lose less money.  They're not there to help you.  The government essentially had to force banks to offer foreclosure alternatives.

Posted by David Monroe, Short Sale Real Estate Agent (Keller Williams Realty) almost 5 years ago

We tried to short sale and our bank would not let us. We are trying for the DIL route but I don't have high hopes. I feel the bank wants to foreclose which I don't get. At the beginning the house was move in ready but not so now due to banks stupidity. I just don't understand why after all we tried for two years they are doing this.

Posted by Tammy almost 4 years ago

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