Give the Bank a Deed in Lieu of Foreclosure or Give Up on the House?

Knowing when to give up on a house in foreclosure can be a tough decision for homeowners to make. Although many would rather keep their home and are quite willing to make affordable payments to the mortgage company, this is not always an option. Selling to avoid foreclosure may not even be an available method if property values have declined and the homeowners owe far more than their homes are worth. This leaves them with only two options, both of which will end up in their losing the home. These two methods are offering the bank a deed in lieu of foreclosure or giving up and abandoning the property.

Despite the widespread fear of calling the lender to inform them of a financial hardship or ask for help, homeowners should just call the bank and ask them what the lender can do to start the process of reviewing an offer for a deed in lieu of foreclosure. Mortgage companies are not allowed to request their clients give them a deed in lieu, because it must be offered voluntarily. In fact, many mortgage companies will not even suggest this option to homeowners in default, because they do not want to be viewed as persuading the clients to give up their home, and because they would rather have the money to pay off the mortgage or get it back on track.

Thus, it will be up to the homeowners themselves to begin the process of speaking to the bank about deed in lieu of foreclosure. Furthermore, this should be done as soon as they know they will be unable to stop foreclosure any other way. It does not matter one bit what horror stories they may read about their mortgage company from other clients in similar situations -- some deeds in lieu they will accept, others they will not. But the foreclosure victims will not know what they bank will decide about their specific property until they try this option.

The deed in lieu will look bad on the homeowners' credit after foreclosure, but not as bad as having a large number of late mortgage payments leading up to a foreclosure where the property is sold at a county auction. Avoiding a full foreclosure will do a little to help preserve the former owners' credit after losing the home and will allow them to start the process of financial recovery sooner than if they just gave up on the house. This may seem like only a minuscule benefit to using a deed in lieu, but even a few months to begin recovery and a few extra points higher of a credit score may mean all the difference if another home is to be purchased in a few years.

One of the benefits of giving a deed in lieu is not having to worry about a deficiency judgment after foreclosure. If the bank accepts the deed in lieu of foreclosure, they can not stick the homeowners with any more debt after accepting. The bank accepts the deed to the house (DEED) instead of (IN LIEU OF) taking the bank through the legal process of foreclosure (FORECLOSURE). This method is considered payment in full of the mortgage obligation. The owners will not owe anything else after giving their mortgage company the deed in lieu and there will be no danger of ending up with a judgment or the bank trying garnish wages.

The real danger in using a deed in lieu, though, is when the homeowners wait too long. The bank will not accept this if they are days away from selling the house at a sheriff sale; it will take less time and effort just to have the property auctioned off. Furthermore, if the homeowners wait and wait and the house goes into foreclosure and they do not do anything to save it and the property sells for much less than what is owed, then the bank will have an opportunity to sue them again after foreclosure for a deficiency judgment. Thankfully, the vast majority of banks hardly ever do this in practice because they know that foreclosure victims do not have the money to pay tens of thousands of dollars in judgments, and it will cost the bank more in legal fees than they will ever collect.

Homeowners who are unable to afford their home any longer, or would just like to unload their current house and have the best opportunity for quick financial recovery, would do well to consider offering their bank a deed in lieu of foreclosure. Remember, banks will not present this a solution to foreclosure victims, because it must be given voluntarily. But for those who know they will not be able to afford a payment plan or find a lender to refinance with, using a deed in lieu to stop foreclosure is several steps better than giving up on a house, and will not result in the possibility of longer-term negative credit effects, such as a deficiency judgment.

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