If you can no longer meet your mortgage obligations and are facing foreclosure, one option may be what's known as a deed in lieu. Completing a deed in lieu of foreclosure means you give your lender the rights to your property in exchange for being released from your loan.
To apply for a deed in lieu you must first determine whether you are eligible. You cannot apply if you have other credit secured against the property, such as a second mortgage or a line of credit, or if you have any property tax delinquency. Additionally, if your loan is securitized under a pooling servicer agreement (PSA), the rules governing the PSA may prevent a deed in lieu. You should check with your lender on its specific requirements.
Placing your home on the market is the next step. Many lenders require that you attempt to sell your home for at least three months before they will consider a deed in lieu. The lender would rather that you complete the process of selling your home, thus relieving the lender of that time-consuming responsibility. If the house does not sell in the specified time, you can proceed to a deed in lieu.
The application is the next part of the process. You must prove to your lender that you are unable to pay your mortgage. If you have had a sudden financial crisis that explains your situation, such as unemployment or a serious illness, this may make the deed more acceptable to your lender. You should write a hardship letter to outline this circumstance. Your lender will order an appraisal of your home. Once your application is processed, you are required to sign a document that transfers title to the property to your lender, and this document must be notarized and placed in the public record. From the time you apply with your completed paperwork, it usually takes about 90 days to complete a deed in lieu.
Release of Liability
It's important that you receive signed paperwork from your lender releasing you from any liability for a loan deficiency. That is, if your lender is unable to sell the property for the full amount of the loan, you are not left owing the difference. It's also important to be aware of any tax consequences of such debt forgiveness. If this is your primary residence, you should not owe any tax on the amount forgiven. However, if it is a second home or rental property, the deficiency can be treated as income by the IRS, and you may receive a large tax bill.