Deed in Lieu of Foreclosure – How Does it Work?

A Deed In Lieu (DIL), which is the term commonly used for Deed In Lieu of Foreclosure, is a home disposition option in which a mortgagor voluntarily deeds collateral character (their home) in exchange for a release from all obligations under the mortgage.

An interesting misconception about a DIL of foreclosure is that many people feel they can just give the home back to the bank at any time, without meeting any qualifying criteria. This is not true.

There are two dominant criteria that must be met before edges will accept a DIL, instead of going by the foreclosure course of action of taking back a home. First, there can not be a second mortgage held by a different bank, than the bank holding the first mortgage. Think about it. In a DIL situation, the home can only be given to one bank. This is of course the bank holding the first mortgage. consequently, if there is a separate bank holding a second mortgage, they won’t agree to a DIL because they won’t receive anything and will take a total loss on their loan. If the bank holding a second mortgage won’t agree to a DIL, then neither will the bank holding the first mortgage.

The second shared misconception about a Deed in Lieu is that a homeowner who wants to walk away from their home, perhaps because the home is worth far less than what’s owed on it, can easily do so by a DIL. The homeowner often thinks the bank will agree to this as it will save the bank many thousands of dollars by not going by the complete foreclosure course of action.

Unfortunately, this is not the case for homeowners who do not have a financial hardship. edges will not usually agree to a Deed In Lieu unless the homeowner will verifiability be unable to make their mortgage payment. Typically a homeowner will have missed several monthly mortgage payments and submit financial documents showing they can not make their mortgage payments, before a bank will consider a Deed In Lieu of Foreclosure.

The assistance to obtaining a DIL for the homeowner who has just one mortgage and is unable to make their monthly mortgage payments, is the DIL allows them to walk away from the home without a foreclosure on their credit report. The homeowner will nevertheless have any missed payments on their credit history but a DIL is much easier to rebound from and later acquire another mortgage loan, than is a foreclosure.

As mentioned earlier, the assistance to the bank is the cost savings. It costs a bank on average about $50,000 to go by the complete foreclosure course of action. Those attorneys are expensive! So if the bank can avoid most of the expenses of foreclosure, and after exploring every option they feel a DIL is in the best financial interests of the bank, then they will grant a DIL.

Keep in mind the DIL option should only be considered by homeowners who have already explored every possible option for keeping their home. It is seldom the best option and is typically only used when a homeowner must make a decision to either apply for a DIL, or let the home be lost by a foreclosure proceeding.

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