Deed in Lieu of Foreclosure to Stop Foreclosure

There are many different options available to homeowners for stopping a foreclosure. Some of them include selling the property, bankruptcy, and deed in lieu of foreclosure just to name a few.

First, a foreclosure is the legal process a lender uses to take a home when a homeowner defaults or do not make their mortgage payments. Pre-foreclosure is the period prior to the foreclosure between the lender’s initial notice of foreclosure to the actual date of the foreclosure sale. All foreclosure sales can be halted at anytime during this period.

Second, a deed is the instrument that conveys or transfers ownership of a property from a seller to a buyer or a grantor to a grantee as in the case of a Deed in Lieu of Foreclosure.

In essence, the Deed in Lieu of Foreclosure strategy simply involves giving the property back to the bank. The grantor, the buyer, would convey or transfer the property through a Deed of Trust to the grantee, the lender. Both parties in the transaction must enter into the agreement in good faith and voluntarily. What this does is enacts the parol evidence rule, protecting the lender from subsequent claims that he or she acted in bad faith or otherwise pressured the borrower into this type of settlement.

Here are a couple of points a homeowner should know when considering a Deed in Lieu of Foreclosure:

1) your lender’s acceptance is completely voluntary. It’s not an obligation or a homeowner’s right,

2) it is best to have some equity to ensure the loan amount is covered when the property is sold, and

3) if there isn’t any equity and the lender accepts the Deed in Lieu of Foreclosure, then the homeowner may have to pay income tax on the difference.

For example, after returning the property to the lender, the home sold for $ 180,000. However, the homeowner owed $ 200,000; thus, the lender lost $ 20,000. The homeowner may have to pay income tax on that $ 20,000. Let me explain why this could be the case. When the money was borrowed to purchase the home, the homeowner was expected to repay the loan. When they didn’t repay, the lender and the IRS will look at that $ 20,000 as income to the homeowner because they received it, but did not pay it back. Consequently, if the homeowner didn’t include a clause stating that their lender will absolve any deficiency, then the homeowner could possibly be looking at a tax bill.

Deed in Lieu of Foreclosure is just one of several options available to homeowners for stopping a foreclosure. Remember the lender is not obligated, but if conditions are right they will gladly accept the property.