So far we have been hearing and reading a lot about Short Sales and Foreclosures and little about the third option which is a Deed in Lieu of Foreclosure, or simply ” Deed in Lieu” (DIL)
Since the DIL was included in the HAFA rolled out by president as a favored option some people have begun to give it a second glance. Some institutions like Bank of America have started to actively pursue people who could be candidates and they are sending them letters offering to consider the option.
But what is exactly a Deed in Lieu? In brief it is when a homeowner agrees to give back the deed to the property (ownership) to avoid going thru the legal proceedings of foreclosure. This can only be done with a first mortgage and having a second one or any other liens on the property complicates things., and many times this is the main reason why a lender would not accept a DIL.
As far as the impact on your credit score, it bears almost the same weight as doing a short sale, which some people say it is about 200 points deduction in your score, it is considered a settled debt by the credit bureaus. However that does not mean that you turn in the keys and you get to walk away completely free and clear in all cases, so it is very important that you hire someone to at least read over the settlement contracts and legal paperwork before you sign it. In many cases, since the lender will be responsible for now putting the property on the market and getting it sold and they don’t know how much they will be able to net, they reserve the right to a deficiency later on. Just like with a short sale, you have to try and negotiate with them to not include certain key phrases and to let you walk away without asking you to repay, in the present or the future, any part of that debt.
So why does a homeowner or bank choose a DIL over a Short Sale or vice versa? It will depend on each case and the particulars of the situation. For the bank it is much quicker and less expensive than going thru a prolonged short sale tha might take months and might still end up in foreclosures after all that time and effort. However, if there are liens attached, unpaid HOA fees, second mortgages or any other aggravating situations it might end up costing them more time and effort than the short sale, and since many lenders have been working in streamlining their short sale process, the chances of the sale being completed in a decent amount of time, are good. Also, this means the bank gets one mores home to get rid of.
As far as the homeowner, DIL can be a great option since they don’t have to deal with the process of short selling their home, they simply walk away, with a similar credit impact on their record without all the hassles, however, it is harder to get the bank to agree not to attach a deficiency since they have not started the sale process and don’t have as clear a picture of how much they will end up selling it for. The banks have up to now, been very limited on the DIL they had accepted, they had very strict guidelines and that disqualified many homeowners.
One thing is very clear, it is important to explore all your options, case by case and you should do so with the guidance of someone that will help you navigate this complicated waters.
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