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Deed-in-lieu of Foreclosure

Mon Apr 7, 2008 04:04PM | By Tony

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The deed in lieu of foreclosure is the procedure where the borrower conveys all interest in a real property to the lender to satisfy a mortgage that is in default and avoid foreclosure proceedings. This deed instrument immediately releases the borrower from most or all of the personal indebtedness associated with the defaulted loan, and saves the borrower from an embarrassment, associated with a public foreclosure proceeding.

Any unsatisfied debt or deficiency related to the defaulted mortgage is often forgiven. The borrower also saves the credit report from having a foreclosure and may receive more generous terms than he/she would in a formal foreclosure. The lender saves time and cost of a foreclosure proceedings, and has some additional advantages if the borrower subsequently files for bankruptcy. In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Generally, the lender will not proceed with a deed in lieu of foreclosure if the current fair market value of the property exceeds the outstanding indebtedness of the borrower. However with the recent "soft market" policies where the house values plummet quite a bit and fast, the lenders can be more inclined to get deed in lieu done. The lender must receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parole evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations. Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached. Based on Wikipedia Deed-in-lieu of Foreclosure with some additions.

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