When an individual falls behind on mortgage payments, the lender can foreclose the loan, and that consequence has affected millions of homeowners over the past ten years. Millions of homeowners had been unable to keep up with their payments, largely as a result of the 2008 recession. At the same time, they faced a real estate market in which home values were dropping drastically. The result was a homeowner whose property was worth significantly less than the outstanding mortgage balance.
The Foreclosure Process
In an ordinary foreclosure, the property is sold at auction, and the proceeds of that sale will cover the mortgagor’s outstanding debt. When that debt exceeds the amount realized at auction, however, the homeowner is still liable for any deficiency, and the lender may well pursue that deficiency by sending the account to a collection agency. The debtor can seek bankruptcy protection in order to put a stop to further collection efforts. Absent that protection, however, the agency can avail itself of any number of collection options, including garnishing wages and levying bank accounts.
Foreclosure is rarely the best choice for either the debtor or the lender. For one thing, auction sales tend to sell well below true market price, reducing the likelihood that the sale will cover the full amount outstanding. When a balance remains after the auction, the lender has not been paid in full, and the homeowner remains responsible for the shortfall.
The “Deed in Lieu” Option
One way to avoid the traditional foreclosure process and the risks inherent in an auction sale is with a deed in lieu of foreclosure. By using that alternative, homeowners do not have to be burdened with continuing debt even after the property is sold. Instead, they can walk away from the property debt-free.
That fact alone makes a deed in lieu of foreclosure a worthwhile option for many homeowners, but there may be additional benefits. The deed in lieu option can help to maintain the borrower’s credit rating, putting that individual in a much better position if he or she wants to buy another home with another mortgage.
The deed in lieu of foreclosure also has advantages for the lender. A foreclosure is an expensive process, costing banks up to tens of thousands of dollars in legal fees alone, and banks must still pursue deficiencies through collection agencies. Given the possibility that borrowers will seek bankruptcy protection, an option that many homeowners choose, banks are left with little to show at the end of the day.
There are downsides to signing over a deed in lieu of foreclosure. First, it’s not always an option the lender will consider, especially if the loan is badly underwater. For many lenders, a loan with an outstanding balance more than $50,000 above the property’s value is a loan better suited to the traditional auction approach. The decision, however, varies significantly among lenders and depends on several factors.
There are also situations in which a deed in lieu is a bad choice for the homeowner. For example, signing over the deed rarely makes sense if the mortgage has a small remaining balance. In addition, since the homeowner retains the proceeds of sale exceeding the mortgage debt, that opportunity disappears when the deed is signed over. An auction may not the best route to the highest sales price, but homeowners risk losing gains that would rightfully be theirs.
How Can We Help?
For the right borrower in the right situation, a deed in lieu of foreclosure can be the best available option, but it’s critical that homeowners understand the guidelines and laws that govern the process. For an evaluation of your case and the guidance of our experienced real estate attorneys, contact our firm by calling or sending us a message online.