My Mortgage is Underwater. Now What Do I Do? . . . Option 4 – Deed in Lieu of Foreclosure

In the previous articles we introduced this ‘Now What Do I Do?’ series, and discussed Option 1 – Sit Tight, Option 2 – Loan Modification, and Option 3 – Short Sale.

If you really can’t make your mortgage payment, not even reduced ones, and you’ve tried to do a short sale and it hasn’t worked, then maybe by now you feel like you are running out of time.  But there is one more option that may get you out with less damage to your credit record than a foreclosure.  That option is to get your lender to make a Deed in Lieu of Foreclosure agreement with you.  In essence, the lender is acknowledging that you can’t pay, and you can’t get it sold, so maybe they are better off to take the property back now, rather than go through the whole foreclosure process and wind up taking it back later anyway.  The logic for them is that the property is likely to be in better condition if you turn it over to them voluntarily now, and they may be able to shorten the time that they have to hold a non-earning asset, i.e. a ‘problem loan’, on their books.

A key point in either a short sale agreement or a deed-in-lieu agreement is to ensure that you have the lender’s specific statement that they will not pursue a Deficiency Judgement against you for the difference between the value of the property and what you owe them at the time of the agreement.  My recommendation is that you have an attorney read the agreement to make sure that it is clear on that point before you sign it.  If you want to review some of the legal framework for this, refer back to the  Option 3 – Short-Sale article and the paragraph starting “Bear with me on a bit of legalese…”

If your lender will not give up the right to a deficiency judgment, and that would be a significant overhanging debt for you,  maybe you are better off just letting the propety go into foreclosure and wipe the slate clean that way.  Once again, if you are in this kind of situation, talk with an attorney.  My only purpose here is to give you an idea of how things work, and help you ask the right questions if the time comes.  If your lender is participating in the HAFA process described in the Option 3 – Short-Sale article, the deficiency judgement problem should not arise, but check to make sure.  That HAFA process provides for doing a Deed in Lieu of Foreclosure as a fallback from an unsuccessful Short Sale .

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