Negotiating Deed in Lieu of Foreclosure

by Wayne in Lewiston, Maine and by Zoie from Durham, North Carolina

Ask Kate how to negotiate during the deed in lieu of foreclosure process: It's not always simple to know how to work with your lender when a mortgage payment is no longer affordable. Divorce can complicate the process. A 2nd mortgage also creates unexpected twists and turns for already distressed homeowners.

So let's take a look at two situations where the deed in lieu of foreclosure process has become difficult and discuss options.

But first, let's define the process. In a nutshell, a deed in lieu of foreclosure, also known as D.I.L., occurs after a homeowner contacts their loan servicer to deed back the house. Avoiding foreclosure, the property is quickly turned over to the lender while the borrower is forgiven the mortgage debt.

Depending on your lender, the D.I.L. process may also offer $10,000 for relocation expense in exchange for a house that is left in a suitable condition. (More on this later.)

Deed in Lieu of Foreclosure and Divorce

By Wayne in Lewiston, Maine

Hello Kate,

I am in desperate need of help; my ex-wife has bailed on making payments on the house she lived in after our divorce 4 years ago. She was ordered by the bank to make the payments but has not.

She is extremely behind on payments so we pursued a deed in lieu of foreclosure.

The bank agreed to this and we negotiated that they waive the deficiency, however, the bank is now asking that I pay a lump sum of 13,000 dollars to move forward.

I have 10k in my savings but that's all I have and my ex-wife will not pay a dime. Should I agree to this or should I just let them foreclose? I am so lost please help.

Ask Kate answers: Deed in Lieu of Foreclosure and Divorce

Hi Wayne,

It really stinks when court orders are not enforced per the divorce decree.

In addition, lenders are not bound by the court's decisions, as you are finding out. So, since you are still a borrower on the mortgage, you are smart to take action to protect yourself.

Here a couple of options...

1. Negotiate the Deed in Lieu of Foreclosure

Try to negotiate the $13,000 down to an affordable amount by offering the lender quick possession to the property. In addition to a speedy turn around, lenders are also interested in knowing a house will be fully vacated with no personal belongings left behind.

Often in foreclosure, a house is vandalized before the lender can take possession. Assure the lender that this will not be the case and that they will be receiving back a property that can be immediately sold.

2. Short Sale for Underwater Homes

If there is negative equity, you could pursue a short sale instead of deed in lieu of foreclosure. In the short sale process, you put the house up for sale. Then both you and the lender accept an offer from a home buyer for less than the principal balance of the mortgage.

You can read more about the short sale process here.

3. Foreclosure Process as a Last Resort

Lastly, there is the option of foreclosure, that is plainly walking away from the mortgage and the house.

I understand the lack of appeal but here's the thing. Since you are still a borrower on the mortgage that your ex-wife defaulted on, most likely your credit has been adversely affected already. Aggravating as it is, short sales and deeds in lieu of foreclosure also tarnish credit records and lower scores. I point this out in case foreclosure becomes your only option.

It isn't often that you will hear me saying what I told Deborah at Short Sale vs Mortgage Foreclosure - The Agony of 21st Century Homeownership. Perhaps it would ease your mind to read my response.

Of course, you also need to consult a CPA to learn of tax implications, regardless of the path you choose -- deed in lieu of foreclosure, short sale, or foreclosure itself.

Wishing you the very best of luck,

Deed in Lieu of Foreclosure Request with 2nd Mortgage

By Zoie H from Durham, NC

Kate,

We have applied for a deed in lieu of foreclosure with NFCU. The property has a 2nd mortgage with a Hardest Hit program lender that will forgive the loan, if NFCU would request a statement of satisfaction.

But my mortgage company (NFCU) will not continue the process, or request the statement of satisfaction.

What can we do?

Ask Kate answers: Deed in Lieu of Foreclosure Request with 2nd Mortgage

Hi Zoie,

A 2nd mortgage complicates the D.I.L. process because a lender is not as free to sell the property afterward. This negates the benefit of getting the mortgage off the lender's books quickly and is probably why your loan servicer won't move forward.

You have a 2nd mortgage lender that would cooperate. Not all are willing to. But sadly, trying to convince your 1st lien holder of that is like trying to change the course of the Titanic.

Hardest Hit Funds - Principal Reduction Program

So let's take another direction. Try calling the North Carolina Housing Finance Agency at 888-442-8188 and ask them for assistance dealing with your lender. There are no guarantees that they can, but why not try?

Remember also, access to the Hardest Hit Funds is not dependent on your lender's cooperation. Perhaps this could become an alternative to a D.I.L. and contribute to saving your home.

Read more about this help at Hardest Hit Funds - Principal Reduction Program where I explain how the Treasury Department has allocated over 7 billion dollars to help struggling homeowners in the hardest hit states who are unemployed or underemployed. Additionally, the funds go toward principal reductions, elimination of 2nd mortgages, and relocation funds. Best wishes to you,

Have You Seen These Ask Kate Answers

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• USDA Rural Home Loans: Zero Down Payment Mortgage

You can also ask Kate a mortgage question or add a comment at the bottom of this page.

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