How to Negotiate a Deed in Lieu of Foreclosure

A deed in lieu of foreclosure option allows a borrower to turn over the deed to his or her home in exchange for release from the mortgage debt associated with the property. In shape and form, it is the same as a foreclosure. However, the main advantage is that the borrower does not have to go through foreclosure and suffer financial consequences from that process.

#1 Consider All Alternatives

A lender will in most cases prefer to foreclose on a property. In a foreclosure, the lender can charge the borrower all costs associated with taking over the property and, furthermore, go after the borrower for any outstanding unpaid debt. Since lenders may prefer this option, the borrower will have to sway the lender away from foreclosure proceedings. The first step to doing this is to outline the likely scenario that would result from a foreclosure. For example, consider if you could pay the lender outstanding debts or you would have to declare bankruptcy and be unable to pay any additional debts.

#2 Present Alternatives to Lender

If you discover that the alternative options are unfavorable to the lender, present this information. For example, tell the lender that you will have no choice but to declare bankruptcy if foreclosure occurs. Provide estimates of foreclosure costs to the lender in your area. If applicable, show the lender the challenges of selling a foreclosed property. 

#3 Verify Statements Made in Your Presentation

Any statement you make to your lender will have to be verified. For example, if you have told your lender that you will declare bankruptcy in the case of a foreclosure, verify this statement. Do so by showing you cannot fiscally afford to repay the remaining balance on the loan once the property enters foreclosure. Provide a statement from a bankruptcy attorney showing that you would not be required to repay the debts, where applicable. 

#4 Propose a Solution

Once you have shown the lender how costly it would be to go through foreclosure with you, present a viable alternative. Show how the cost of a deed in lieu would be less expensive. If you are eligible for the Home Affordable Mortgage Program's foreclosure alternative programs, supply your lender with information about these programs. Your job is to convince the lender they will benefit through deed in lieu. If you can do this, most lenders will agree to work with you to avoid foreclosure. 

#5 Follow Legal Guidelines to Finalize the Transaction

A deed in lieu program works only if both parties agree to the transaction in good faith. Your mortgage must be secured against your home, and the lender must be willing to accept this collateral voluntarily to cancel your remaining debt. As a result, it is essential that you follow legal guidelines to show that your lender has voluntarily agreed to this option. Otherwise, the lender could sue you in the future for any remaining balance on your loan once the home has been sold. You may be obligated to pay this amount if any portion of your deed in lieu of foreclosure process is not lawfully completed. 

How long does a deed in lieu of foreclosure stay on your credit report?

While completing a deed in lieu of foreclosure can save you from some legal hassle and financial penalties associated with an actual foreclosure, your credit report will show the same negative effect as if you actually went through a foreclosure proceeding. To have the best chance of saving your credit, negotiate how the process will be reported with your mortgage lender. Ask the lender to report the incident as a loan resolved in an unsatisfactory manner, not as a foreclosure. If you do have the foreclosure on your record, it will go away within 5 to 10 years depending on your state. Research your state's lending laws to find out the precise timeframe. 

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