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If only returning your home to the bank—formally referred to as a deed in lieu of foreclosure—was that simple
Actually, it usually goes like this: You attempted to make a quick sale, but it was unsuccessful. As a last resort, you ask if you can convey the title of the home to the bank.
If you’re lucky, in exchange for ownership of the property, the lender agrees not to foreclose. In addition, the lender cancels the loan and clears you of any remaining debt owed on the mortgage.
However, a deed-in-lieu will hurt your credit and it is not a magic bullet solution. So what does this route entail and should you pursue it?.
For more information, we’ve looked into recent government guidelines and had a conversation with Glen Henderson, a renowned San Diego real estate agent with nearly two decades of expertise helping homeowners in financial distress.
Equipped with the information, we’re here to address your most pressing queries regarding the informal “hand-back” approach and provide you with the full rundown of its benefits and drawbacks.
When facing financial hardship and the looming threat of foreclosure, many homeowners wonder if they can simply give their house back to the bank. This option, known as a deed in lieu of foreclosure, can be a viable solution in certain circumstances, but it’s crucial to understand the process, its implications, and alternative options before making a decision
What is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a legal agreement where you voluntarily transfer the ownership of your house to the lender in exchange for the cancellation of your remaining mortgage debt, This essentially allows you to walk away from the property and avoid the lengthy and stressful foreclosure process,
When Should You Consider a Deed in Lieu?
Giving your house back to the bank should be a last resort, pursued only after exhausting all other options. Here are some situations where a deed in lieu might be a viable option:
- You cannot afford to make your mortgage payments and have no prospect of catching up.
- You have explored other options like loan modification, short sale, or selling the property traditionally, but none have been successful.
- You want to avoid the negative impact of foreclosure on your credit score.
Pros and Cons of a Deed in Lieu
Pros:
- Avoids the foreclosure process: This can save you time, money, and emotional stress.
- Cancels your remaining mortgage debt: You are no longer responsible for the loan.
- Less severe impact on your credit score than foreclosure: While it will still negatively affect your credit, the damage is less severe.
Cons:
- Loss of equity: You will lose any equity you have built up in the property.
- Negative impact on your credit score: It will still lower your credit score, making it difficult to obtain new loans in the future.
- Tax implications: The forgiven debt may be considered taxable income.
How to Complete a Deed in Lieu of Foreclosure
The process of completing a deed in lieu of foreclosure varies depending on the lender and state regulations. However, here’s a general overview:
- Contact your lender: Inform them of your financial hardship and desire to pursue a deed in lieu of foreclosure.
- Provide financial documentation: Submit proof of income, expenses, and hardship, such as job loss or illness.
- Negotiate with the lender: Discuss the terms of the agreement, including any outstanding fees or charges.
- Sign the deed: Once approved, sign the deed transferring ownership of the property to the lender.
- Move out: Vacate the property by the agreed-upon date.
Factors to Consider
Before pursuing a deed in lieu, consider the following factors:
- Lender’s approval: Lenders are not obligated to accept a deed in lieu, and they may deny your request based on various factors.
- Impact on credit score: While less severe than foreclosure, a deed in lieu will still negatively affect your credit score.
- Tax implications: The forgiven debt may be considered taxable income, so consult a tax professional.
Alternatives to a Deed in Lieu
Before resorting to a deed in lieu, explore other options that may help you avoid foreclosure:
- Loan modification: Negotiate with your lender to modify the terms of your mortgage, such as lowering the interest rate or extending the repayment period.
- Short sale: Sell your house for less than the amount owed on the mortgage, with the lender’s approval.
- Sell your house traditionally: If possible, sell your house at market value to pay off the mortgage and potentially keep some equity.
Giving your house back to the bank can be a viable option in certain situations, but it’s crucial to understand the process, its implications, and alternative options before making a decision. Carefully weigh the pros and cons, consider the factors involved, and explore other possible solutions to find the best course of action for your specific circumstances. Remember, seeking professional advice from a financial advisor or real estate agent can help you navigate this challenging situation and make informed decisions.
What happens if I surrender my house to the bank voluntarily?
In an attempt to quickly escape a difficult financial situation, you might be willing to give the bank title to your house if you’re desperate to be free of mortgage debt that you can’t afford. But before you can wave the white flag, you’ll need to exhaust your other options.
These include:
After about three months of missed mortgage payments, you’ll likely receive a Demand or Notice to Accelerate letter, informing you of how much you owe and providing 30 days notice to get your balance current. From there, it can be two to three months to the scheduled sale of your property if you take no action to square up with the mortgage company, HUD’s guidelines note.
This provides you some leeway to recognize the signs and sell the house before foreclosure occurs.
You have until your scheduled auction date to sell your house on your own, even if your mortgage company has started the foreclosure process.
A recent report from CoreLogic shows that U.S. homeowners gained 10.8% in equity from 2019 to 2020, making it possible your home has increased in value substantially in the past year alone to help cover your debts.
The trick is that you also have to ensure that the value of your home will pay for all of the regular selling fees (which can range from 9% to 10% of the sale price), any attorney fees, and late fees you owe for missing payments.
Sometimes an agent will simply consider the loan balance associated with the property and believe it will be easy to collect the past-due amount following a sale. However, Henderson notes, “they don’t account for the late fines and legal costs that are added to the outstanding balance on a defaulted mortgage.”
With the assistance of HomeLight, you can locate an agent in your area who is at ease interacting with lenders and attorneys and who can guide you through the complexities of your case. In fact, some agents have earned special designations for handling short sales, foreclosures, and distressed sales. We are pleased to push these agents to the top of your search results so you can quickly receive the assistance you require.
With a loan modification, you work with your lender to change the terms of your mortgage when you’re struggling to afford payments. The lender may agree to lower the payment amount, lengthen the term of the mortgage, or lower the interest rate to reduce your risk of default. To qualify for a loan modification, you’ll need to formally apply and be able to show proof of hardship.
Due to circumstances surrounding the coronavirus pandemic, the government has offered additional mortgage relief options through the CARES Act, including forbearance plans.
Forbearance plans give you the option to temporarily suspend or lower your mortgage payments and make up the difference at a later time, but they do not completely eliminate your mortgage debt.
However, as an additional form of relief, the Consumer Financial Protection Bureau has stipulated that mortgage servicers who offered forbearance plans under the CARES Act cannot require borrowers to pay back what’s owed in a lump sum.
However, you shouldn’t expect your loan modification request to be granted unless it falls under the CARES Act or pandemic-related relief options. “They are very difficult to obtain,” says Henderson. ”In my experience, most of the (pre-pandemic) loan modification requests resulted in a denial. ”.
A short sale is when your lender agrees to let you sell your home for less than you owe on your mortgage. Lenders will usually prefer a short sale over a deed-in-lieu of foreclosure.
“The lender is going to recommend you try to do a short sale first. If that has failed, they will allow a review of a deed-in-lieu of foreclosure,” Henderson says.
With a short sale, the lender receives the funds from the sale of the property. They obtain ownership of the property through a deed-in-lieu, but they also have to handle the difficulties and arrangements of selling it.
See how that’s more work for them?
Because the lender agrees to cancel your mortgage debt even if the funds “fall short” of the principal loan balance, these sales are known as “short” sales. However, don’t expect a “short” speed of closing.
You will have to continue making mortgage payments until the short sale closes, which could take four to five months (or even longer in some cases). A short sale can also lower your credit score by 100 points or more.
When does foreclosure begin?
Individual states and mortgage companies have different rules and guidelines for when foreclosure begins. According to HUD (the Department of Housing and Urban Development), it’s usually three to six months after your first missed mortgage payment.
Keep in mind: Lenders hate foreclosures! They don’t want to go through with it if they can help it. According to the U.S. Congress Joint Economic Committee, a lender will lose 12%-19% of a home’s value and spend about $50,000 on foreclosure proceedings if they have to foreclose.
Henderson states, “If the property is allowed to go into foreclosure, it will most likely remain unoccupied for a long period of time.” “In my view, the only party that gains from a foreclosure is the real estate investor who gets to purchase the property from the bank after it has been abandoned and decaying for 12 to 24 months.” ”.
When faced with the risk of foreclosing, Henderson urges homeowners to be proactive:
“Contact the lender immediately,” he says. Henderson feels that the sooner you start discussing your circumstances and working with the lender on different options, the more likely it is that the lender will take the time to consider all the relevant aspects of your particular case and collaborate with you to identify alternatives to foreclosure.
Will the Bank Foreclose On My House?
FAQ
What happens if you let a house go back to the bank?
What is it called when you give your house back to the bank?
What happens if I let the bank take my house?
Does giving a house back to the bank affect your credit?
Though the hurt is less than the foreclosure would be, deciding to give a house back to the bank does create a negative effect on your credit rating. If you have a deed in lieu of foreclosure on your credit history, you will have to wait several years before you can get another mortgage.
Can I give my House back to the bank to avoid foreclosure?
The answer to this question is yes, you can give your house back to the bank to avoid foreclosure in a process known as deed in lieu of foreclosure. Before pursuing this option, first look into a short sale, loan modification, or simply selling the property.
Can a bank give a house back to the bank?
You can give your house back to the bank through a voluntary process called “deed in lieu of foreclosure.” Homeowners who realize they can no longer afford their home often choose this route instead of allowing the bank to foreclose on the property. The bank benefits by saving on the legal fees necessary for a forced foreclosure.
What happens if a bank takes your house back?
Many states allow lenders to pursue the difference between what you owe the bank and what they recover from the sale of your house after they take it back. If you owe $210,000 and the bank only gets $160,000 after selling your house and paying its expenses, you’ll be on the hook for the remaining $50,000.