Realizing that you are no longer able to financially stay afloat in your mortgage can be devastating. You never imagined when you closed on your home that years later you'd be faced with the decision to let it go. Many people find themselves having to make difficult choices in relation to their auto loans, mortgages, and other debts – but the fact is that all too often loss of jobs, illness, and the ever-changing economy leaves families in positions they never expected to be in.
Once you resolve that you'll no longer be able to fulfill your mortgage obligations, it's important for you to know that there are multiple options you have to move forward. Foreclosure is a term that, thanks to the most recent economic downfall, most people are familiar with. In addition to a traditional foreclosure, you may find that a Deed-in-Lieu of a Foreclosure is actually more beneficial for your situation.
What is a Foreclosure?
The foreclosure process begins when timely payments to the mortgage lender are no longer being made. This could be because of hardships such as, loss of employment, divorce, illness, or death of a sole provider or could be a decision made to allow the property to go back to the bank.
Generally, within three to six months of the missed payments, the lender will record a public notice indicating that the borrower has defaulted on the mortgage. After receipt of Notice of Default from the lender, the borrower enters a grace period known as "pre-foreclosure" - it's during that time that you can work out an arrangement with the lender either via a short sale or by paying off the outstanding amount owed.
If an agreement hasn't been arranged by the set deadline, the lender will set a date for the home to be sold during a foreclosure auction. During the auction, the home is sold to the highest cash bidder. If the home does not sell during the auction, it becomes a bank-owned property and the bank takes possession of the home.
What is a Deed-in-Lieu of Foreclosure?
During a Deed-in-Lieu of Foreclosure, you voluntarily transfer the ownership of your property to your lender in exchange for a release from your mortgage obligation and payments. There may be significant tax issues, so it's important to consult your CPA in this before entering into a deed-in-lieu with your lender. Not every homeowner facing a potential foreclosure is an ideal candidate and will qualify for a Deed-in-Lieu of Foreclosure.
You are generally eligible for this program if:
- You're experiencing financial hardship such as reduced income (loss of employment), medical expenses or a divorce
- You are no longer able to afford your current mortgage payment
- You're unable to modify your current mortgage to make it affordable
- You tried for at least 90 to 120 days to sell your property at fair market value with the help of a licensed real estate agent but were unsuccessful
What Are the Benefits of a Deed-in-Lieu Of Foreclosure?
If eligible for a Deed-in-Lieu of a Foreclosure, some of the benefits to choosing this path include:
- The ability to eliminate your remaining mortgage debt
- You may be eligible for up to $3,000 relocation assistance (depending on your circumstances)
- Start repairing your credit sooner than if you went through a foreclosure
- May be eligible for a Fannie Mae mortgage to purchase a home sooner (in as little as 2 years) than if you went through foreclosure (up to 7 years)
- Flexible exit options let you leave the home immediately, stay in the home for up to three months without paying rent, or lease the home (at market rates)for up to one year
Knowing which option is truly the best fit for your current financial situation is difficult to judge. We strongly suggest that you consult with an experienced foreclosure defense attorney at the beginning stages of your hardship to create a plan to help you move forward. An attorney will be able to guide you in selecting the course of action that will not only benefit you now but also help you build on financially for your future.