Is Deed in Lieu right for you?

Deed-in-lieu of Foreclosure (DIL) was not getting much attention a year ago, but today, a lot more upside-down homeowners are talking about it. This is no accident. Mortgage lenders have started more aggressively pushing for them. Why? Because it saves them money, of course. But is it good for homeowners? Let’s review!

First, what is DIL? DIL is the current homeowner agreeing to sign title over to the lender. This saves the lender from having to go through the time and expense of foreclosure, which can easily cost the lender tens of thousands of dollars. The law will not allow the homeowner to do this unilaterally. The lender has to agree to it.

What are the benefits to the homeowner?

  1. They “get” to leave sooner rather than later with the disposition of their home “resolved.”
  2. The bank typically will pay them to leave—anywhere from $1,500 to $3,000.

What are the draw backs for homeowners?

  1. The homeowner gives up their legal rights and is compelled to leave when the lender says they must leave, rather than the lender having to follow normal legal guidelines.
  2. In other words: the homeowner must leave much sooner than they would in a foreclosure or short sale. So even though a lender may pay them $3,000 to vacate, if they vacate 3 to 6 months before they would otherwise have to, have they saved any money? Or has this COST them money?
  3. DIL does not guarantee that the homeowner is free from further debt liability. Though a lender will agree to take over the home, they will not automatically forgive the unpaid principal after the lender sells the home. The homeowner could still be on the hook for this. Debt forgiveness must be negotiated. This is particularly true for non-purchase money loans (refinances after the purchase of the home).
  4. DIL does NOT mean that the word “Foreclosure” will not still show on your credit report. There are no guarantees how the lender will choose to report it, and they often do report it as a foreclosure, and thus prevent the current homeowner from qualifying for new mortgage financing (to buy a new house) for 7 to 10 years—versus 2 years after a short sale.

Who qualifies?

Note that the purpose of a foreclosure is to clear title of all subordinate claims against the house except for the primary lender (not taking into account property taxes). So if there is more than one mortgage lien against the property, if the home does not go to foreclosure, the junior liens must agree to come off title. They won’t do this for free. So who can get a DIL?

  • If the homeowner has one lien, they should be able to negotiate one.
  • If they have two liens, both purchase money (loans used to buy the home), both with the same lender, they could get one (it will likely take more time to negotiate).
  • If the homeowner, however, has an equity line-of-credit, even with the same lender as the First Trust Deed, they will NOT be able to negotiate a DIL. Similarly, if the 2nd lien is with a different bank, be it an equity-line or purchase money, the homeowner can count on NOT being able to negotiate a DIL. There just won’t be enough money to pay off the junior liens.

Bank representatives are still suggesting homeowners with two and three liens (with different lenders) attempt to get a DIL. I have never seen one or heard of one being successful. The only way to force the junior liens to come off title is through an actual foreclosure process, or SOMEONE will have to pay the junior lien(s) a LOT of money. In a short sale, the buyer can be asked to pay them off. In a DIL, there is no buyer! Only the seller’s money.

Remember, the bank is NOT your friend, despite the cheery disposition of your bank customer service representative. Your lender is more than willing to give you a bad deal if it benefits them. EVERYTHING they do, from the questions they ask you to the documentation they request, is geared toward establishing leverage against you to assist them in collecting their debt. You MUST be educated before engaging them. It usually helps to have some professional guidance.