If a borrower is no longer able to make payments to a lender in agreement with loan documents, he or she can relinquish the property to the lender. This is an alternative to foreclosing on the property in order to settle the debt. A deed in lieu of foreclosure can be beneficial to both the borrower and the lender, but there are also risks involved. If you want to pursue a deed in lieu of foreclosure, it’s important to know the different steps of the process.
Deed in Lieu of Foreclosure vs. Short Sale
Many people mistakenly think that a deed in lieu is the same thing as a short sale. It’s common for a borrower to benefit in a transaction where the lender pays for a portion or the entirety of transfer expenses, including the title policy, taxes and recording costs. If there property is sold from the borrower to a third party, sales commission will not be incurred.
Benefits of a Deed in Lieu
A deed in lieu is able to save both time and expenses for all parties involved in the process. The borrower benefits when there are transactions that the lender pays for either in part or in full, such as transfer taxes, recording costs and title policy.
Due Diligence Explained
Due diligence is a common phrase in deed in lieu, referring to the various stages that the lender has to go through before being allowed to accept a deed in lieu of foreclosure. The due diligence process includes the following steps:
Before continuing with the process of deed in lieu, the lender has to understand the responsibilities of owning the property. The lender will have to review contracts and agreements for the property, which may include equipment leases, management contracts, brokerage agreements and service contracts. The lender will also have to determine if the contracts can be transferred and if they should continue or terminate them.
The lender has to get the property’s updated Phase I environmental report. While there are a few exceptions, the mortgage lender will normally get the property title either by deed in lieu or by foreclosure, becoming the owner and operator who’s liable for the costs and expenses of working with hazards.
People who are interested in filing for a deed in lieu should keep in mind that the lender has to conduct UCC financing searches on the property. These searches determine the liens and topics that affect the property. A lot of lenders won’t accept a deed in lieu if there are secondary liens that are revealed during the searches. Even if there will probably be a minimal amount of time from when the title is recorded to when the foreclosure dismisses the secondary liens, lenders are still not apt to accept the deed in lieu.
It’s common for bankruptcy to play a large role in deed in lieu. Lenders always consider any debts of the borrower, and bankruptcy is one of the financial concerns that may affect the deed in lieu. It may be best to seek counsel from a bankruptcy lawyer before continuing with the deed in lieu process.
Negotiating a Deed in Lieu
During the settlement agreement, the motivations of each party should be recorded. Deed in lieu agreements are required by state law to be voluntary transactions. Borrowers are allowed to buy back the property via complete payment with a predetermined time frame. The only way a borrower will lose the right to get back their property is through bank compensation or a valid foreclosure. Since negotiating a deed in lieu is such an in-depth process, it’s best o have to it done by a legal professional.
The Deed in Lieu Settlement Agreement
It’s important for both the borrower and the lender to record the transaction via a settle agreement. The borrower benefits the most if the transaction is simple and doesn’t list anything regarding the deed transfer in exchange for a loan liability release. Documents that are agreed upon by the borrower and lender will show that the transaction is voluntary. It’s not recommended that non-professionals draft their own deed in lieu settle agreement.
Trying to decide if deed in lieu is the right option is a big decision. The procedure is complex, and without the right guidance, you could risk your finances. Our firm is here to help you. Create a better future for yourself by contacting us today by phone or by sending an online message today.