When times get tough and you cannot make your mortgage payments, you may find yourself looking for a solution. Unfortunately, foreclosure is becoming a prevalent occurrence. According to the FDIC and NeighborWorks America, one out of every 200 homes will face foreclosure at some point. In major cities, this means thousands of people will lose their homes to foreclosure every single year.
When looking across the nation, these statistics mean that every three months, 250,000 new families will face foreclosure. Many factors can impact this, including markets with falling home values or homeowners that do not understand the details of their mortgage agreements. Many distressed homeowners simply feel that they have no options.
Yet foreclosure is not a good situation for lenders, either. Lenders spend around $50,000 to foreclose on a property. This means they are highly motivated to avoid the foreclosure process, and in many states, they offer homeowners the chance to make up the missed payments to avoid the foreclosure process.
But for homeowners who are in a serious bind, this may not be an option. What can you do if you know you can’t afford to catch up on your payments, and your bank has rejected loan modification or short sale options? Can you give a house back to the bank to avoid foreclosure? Here’s a closer look at your options.
Deed in Lieu of 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.
If you have come up against a wall and have no other option, this process lets you sign a deed over to the bank to rid yourself of the house. This will cancel your remaining balance so you can move on with your life.
Pros of a Deed in Lieu of Foreclosure
Why should you consider giving your house back to the mortgage company this way? The foreclosure process is long and stressful, and this process allows you to skip it.
You also have the option to avoid the fees and expenses of foreclosure, and it’s the faster way of the two to get out from under the debt and move on with your life. Finally, deed in lieu of foreclosure does damage your credit, but not as badly as a foreclosure.
Cons of Deed in Lieu of Foreclosure
So with all of those pros, why would you not consider this route? First, if there is another way to get out of your debt, such as selling your home traditionally, you can avoid a ding on 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. Typically the waiting period is four years, but this is better than the seven years with a foreclosure.
Finally, perhaps the most obvious and severe consequence of a deed in lieu of foreclosure is that it will lead to monetary loss. Your debt will be canceled, but in exchange, you have to surrender your home, including what you put into it for renovations and appreciation it has acquired.
How to Complete a Deed in Lieu of Foreclosure
A deed in lieu of foreclosure isn’t as simple as mailing your keys to the bank and walking away. You cannot give a house back to the mortgage company quite this easily. There is a process you must follow, and you must start the process before the foreclosure process begins.
First, put your home on the market. Even if you know the home won’t sell, it shows the lender that you are ready to pursue all potential options to take care of your debt problem. Remember, your bank is not going to agree to a deed in lieu of foreclosure unless there are clearly no other options other than foreclosure.
Next, take a look at your mortgage statement. You need to ensure that you are behind in payments. You can only pursue a deed in lieu of foreclosure if you are actually behind in your payments. Otherwise, the bank will assume you are not actually at risk for foreclosure and require continued payments. Typically, you will need to be 30 days or more behind.
After confirming that you are behind, gather proof of your financial status. This starts with proof of income, which may be your last two pay stubs. Then, your tax returns. You also can show a financial statement outlining your expenses, as well as the past few months of bank statements. These documents will show your lender that you truly cannot afford to continue paying the mortgage.
Next, write a hardship letter. Tell the lender why your circumstances have changed and you cannot pay your mortgage. Situations like job loss, extended illness, or the death of a spouse can all be part of the hardship letter.
Now the lender must decide. First, the lender will perform a title search. Only first mortgages can have a deed in lieu of foreclosure, and you may get denied if you have additional mortgages on the property.
If there are no other liens, the lender will as for a broker’s price opinion to determine the property’s market value, which leads to the final decision. You will receive a notification from the bank about your approval or denial based on all of this information.
Factors to Consider
When you try to give a house back to a mortgage company through deed in lieu of foreclosure, you must remember that they are not obligated to agree. Your appeal may be denied for a number of reasons, including:
- Agreeing is not profitable for them
- The home appraised for too little
- You have other loans, judgments, or encumbrances on the property
- Your purchase and sale agreement prohibits a deed in lieu of foreclosure
If you receive approval, you will need to sign the title transfer with a notary, and you will be ready to move forward.
Does This Process Make Sense for You?
For some homeowners who are in serious financial trouble, choosing to give a house back to the bank to avoid foreclosure makes sense. However, this must be a proactive process, and you need to take measures before foreclosure starts. You also can only use this process in the right circumstances and as a last resort.
There may be another option to rid yourself of a house you can no longer afford. To make the most out of a pending foreclosure situation, consider selling it in a different way. Selling to HomeGo is a better option than foreclosure or a deed in lieu of foreclosure.
Not only is it more profitable for you, but it also has no damaging impact on your credit history. You can sell more quickly and with less hassle than the deed in lieu of foreclosure process. Reach out to HomeGo today to learn more about our fast, convenient home selling process.