The Advantages and Disadvantages of a Deed in Lieu of Foreclosure

deed in lieu NJ

 

It happens to a lot of people in New Jersey these days – the high cost of living finds you over extending yourself. One minute you’re keeping your head above water with utility bills, unsecured debt, and mortgage payments.  Then something happens; an unexpected illness, a layoff, a divorce – and suddenly you’re too far gone. Once you have consulted with your accountant and an attorney specializing in credit repair you may find that your best decision is to extricate yourself from your property. One option in this scenario is a Deed in Lieu of Foreclosure (also called a mortgage release by some lenders).

 

Essentially, a Deed in Lieu of Foreclosure is when the borrower surrenders the property in question to the lender, and the parties execute a title-transferring document stating that the surrendered property satisfies any remaining debt on the mortgage note. This document will have to be notarized, and will eventually be recorded in much the same way as any other deed. There are advantages and disadvantages to this arrangement.

 

Advantages

  • Borrower avoids any (perceived) public embarrassment from a full foreclosure proceeding and/or sheriff’s sale of the property.
  • Borrower may receive better terms and conditions than would have been available in a more formal foreclosure.
  • Immediately releases the borrower from responsibility of the debt of the mortgage, and any associated collection efforts such as letters, phone calls, or court proceedings (not to mention stress)!
  • Deed in Lieu has much less of a negative impact on one’s credit score than a foreclosure. (When in doubt, call one of the three major credit bureaus and ask.)
  • Reduction in time and anxiety as compared to forcing the lender to take possession of the property, or executing a short sale.
  • You are not required to find a buyer for your property; you are only required to attempt to sell the property.
  • Sometimes the lender will grant certain limited occupancy or other property rights back to the borrower, such as a lease of all or part of the property, an option to purchase later, or a right of first refusal should someone else make a reasonable offer once the Deed is executed and recorded. (Don’t expect this though. In general, lenders want the property with clear title and without any encumbrances.)

 

Disadvantages

  • A Deed in Lieu does not clear second (or even third) mortgages, and therefore will not allow the lender to take clear title to the property. (These are sometimes referred to as junior liens.) And if the Deed in Lieu is accepted, the secondary lender may come after you for the deficiency.
  • The canceled debt may generate a large tax liability, depending on the amount of the mortgage that was remaining at the time.
  • Borrower loses all equity in the property. Since this is a blanket surrender, if the equity exceeds the mortgage amount owed, the borrower will not receive the difference from the lender as they would in a short sale.
  • If the property is not in good condition, the lender may not agree to a Deed in Lieu if the outstanding note exceeds the current fair market value of the property.
  • This option will not likely be offered by the lender, so the borrower must know about and actively pursue this option. The lender must be sure that a Deed in Lieu is voluntary, and so will wait for a written offer from the borrower.
  • The lender may reject an offer for a Deed in Lieu if the property has equity or the federal government is providing financial incentives to the bank to foreclose.
  • Most lenders will not allow you to buy another home immediately after you have executed a Deed in Lieu. Those lenders that buy loans in the second market (i.e. from other, smaller lenders) will not generally buy a note from a borrower who has been part of a Deed in Lieu arrangement for 4 years without extenuating circumstances – or 2 years with extenuating circumstances. Therefore, smaller lenders will be cautious about lending to you as well, even if you decide to downsize and can prove you can make the payments on your new mortgage. Always check, as these guidelines are constantly changing.

 

As with any property conveyance or complex debt elimination, always consult with an attorney specializing in such areas to make sure you are making the right decision for your situation. Remember that a Deed in Lieu of foreclosure is almost always in the best interest of the lender, but it may not be for the borrower. You want to make sure you are doing the right thing. Contact Veitengruber Law; we can help with the tough decisions.

Advertisements