As many as two million Americans will lose their homes to foreclosure this year; when they can’t make mortgage payments due to financial stress, many wonder whether homeownership holds them responsible for repaying the bank solely because they’re in their home. This is an option, or ‘deed in lieu of foreclosure,’ and it has pros and cons. Here’s what you need to know.
What Exactly Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure allows a homeowner to transfer ownership back to the lender, avoiding the foreclosure process. Instead of enduring the lengthy and stressful foreclosure, the homeowner opts to give the property to the bank. In return for this transfer, the bank forgives the mortgage debt, benefiting from the established relationship. While this may seem like an easy solution to avoid foreclosure, it’s crucial to fully understand the consequences before making a decision.
Bets of a Deed in Lieu of Foreclosure
The protection of their credit is one of the prime reasons why homeowners consider other solutions. A deed in lieu of foreclosure won’t take as much of a toll on your credit score as accepting a foreclosure would.
Here are some other potential benefits:
- Avoid Foreclosure: The foreclosure process can be a long, emotional one. A deed in lieu gives homeowners a way to sidestep the public process and much of the fallout of foreclosure.
- Less Financial Stress: This will wipe out the mortgage debt and allow you to get a fresh financial start with no deficiency judgments (in some cases).
- Peace of Mind: If you’ve resolved this issue with your lender, you can now go on about your life.
The Risks to Consider
Deed in lieu of foreclosure sounds like an easy way out, but it’s not.
Here are a few important factors to consider:
- Impact on Credit: While the impact is never as significant as a complete foreclosure, a deed in lieu will still affect your credit score so it becomes more difficult to obtain new lines of credit and purchase a home in the immediate future.
- Deficiency Judgments: Lenders are still allowed to seek a deficiency judgment in some states, which is the difference between what’s owed on the mortgage and the home’s value. If you can, negotiate a waiver of deficiency.
- Tax Implications: Sometimes forgiven debt is considered taxable income. The lender may face taxes on the forgiven debt amount, so consulting a tax professional is highly recommended for guidance.
- Lender Approval: A deed in lieu of foreclosure isn’t for everyone, and not all lenders will agree. Some homeowners may prefer the foreclosure process, believing the home could sell for a higher price at the foreclosure auction.
Alternatives to Consider
If you’re unable to keep up with your mortgage payments but aren’t sure a deed in lieu is right for you. Here are the other options to explore:
- Loan Modification: So, it’s possible that your lender may be willing to change the terms of your loan to work with you, and lower your monthly payments.
- Short Sale: In a short sale, the mortgage balance above the proceeds from the sale is paid as the homeowner’s liability by someone else. The sale price is agreed as full repayment by the lender.
- Forbearance: It means a temporary reduction or suspension of your mortgage payments. It allows you to recover financially without having to wait till your foreclosure.
Conclusion
Giving your home back to the bank may seem like an easy way out, but long-term consequences should be considered carefully. If you’re unable to keep up with mortgage payments, a deed in lieu might offer relief but carries risks. Before committing to any option, consult a financial advisor, attorney, or real estate professional for guidance. Knowing all available alternatives and their consequences helps you make an informed decision that aligns with your best interests. Visit Gold Homes LLC for more blogs, expert insights, and guidance.