The second advantage to the borrower is the avoidance of the publicity, expense, and time involved in proceedings to enforce the mortgage loan and other obligations, with eventual loss of the property. Third, it is possible that the lender will agree to pay all or part of the expenses of the transfer or even additional monetary consideration if there is equity in the property over the mortgage debt.
However, the amount that a lender will pay is generally less than a third party would pay, if one can be found. Finally, it is possible that the lender will grant certain limited possessory or other property rights back to the borrower, such as a lease of all or part of the property, an option to purchase, a right of first refusal, and the like. However, lenders generally resist granting such remaining rights to the borrower in order to obtain the property free and clear of all outstanding interests.
If an option or a right of first refusal is granted, the lender will ordinarily limit the time within which it is available to a relatively brief period of time. The primary disadvantage to the borrower is the loss of the property, the income from the property, and the borrower's investment in the property.
The conveyance of the property is also taxable. A borrower's offer to convey mortgaged property back to the lender must be truly voluntary. There must be no pressure, actual or constructive fraud, unconscionable advantage, duress, undue influence, or grossly inadequate consideration on the part of the lender. In addition, punitive damages may be assessed against the lender if the lender's conduct is flagrant or outrageous.
However, it must be clearly shown that the borrower's necessity was used to drive a hard bargain, and the borrower must conclusively prove wrongful conduct by the lender. To avoid a claim that the transaction was involuntary, it is customary for the borrower to initiate the offer to deed the property back to the lender.
Accordingly, the borrower mails a written offer to the lender, voluntarily offering to deed the property to the lender and stating the reasons therefor. This procedure also prevents the borrower from claiming that the lender did not act in good faith, or that the transaction should be set aside as an "insider" transaction under the Bankruptcy Code. The transaction must be closed promptly after the lender's receipt of the written offer to convey, or else the lender should proceed with foreclosure to avoid delay tactics by the borrower.
The borrower is not relieved of personal liability on the mortgage debt until the transaction closes. The mere tender of an executed deed by the mortgagor or the recording of a deed by the mortgagor to the mortgagee shall not constitute acceptance by the mortgagee of a deed in lieu of foreclosure. See also In re Estate of Shedrick , Ill App 3d , NE2d , 78 Ill Dec 1st D deed must be delivered and accepted to render it operative to pass title; mere fact of recordation or possession of deed by grantee is not necessarily an acceptance thereof.
Bank of Benton v Cogdill , Ill App 3d , NE2d , 73 Ill Dec 5th D mortgagee's written statement to mortgagor did not constitute offer that mortgagor could accept by tendering deed to mortgagee, and alleged statement by mortgagee that he would "start the paper work" did not constitute acceptance of mortgagor's offer to convey property; absent contract waiving its right to a deficiency judgment, mortgagee was entitled to a deficiency judgment.
Second, that there are no junior liens or encumbrances that will be outstanding on the property when it is conveyed to the lender, unless the lender is willing to take title subject to such liens or encumbrances. Third, that there are no conditions imposed on the offer, such as a reservation of possessory rights or a right of first refusal to repurchase, unless such rights are limited and insured to avoid the deed being construed as a continuing security device or equitable mortgage.
Advantages and Disadvantages of a Deed in Lieu
Fourth, that the total expense not including cost of title insurance of accepting the voluntary conveyance will be less to the lender than the expense of pursuing a foreclosure action and bidding at the foreclosure sale to protect its investment. Fifth, that taking immediate possession of the property will be beneficial to the lender, considering the market for the property, any environmental cleanup work that must be done on the property, the tax aspects of taking possession, and any difficulties in retaining or evicting tenants and occupants of the property.
Sixth, that the borrower has no equity in the property that could be realized by a sale to a third party within a reasonable time. A deed may still be taken if an appraisal indicates that there is equity in the property, but there is a risk that such a transaction may be set aside unless the borrower is adequately compensated for the equity. And finally, that an owner's policy of title insurance will be provided by the title insurance company without exceptions for equitable mortgage claims.
All the terms and conditions of the lieu deed transaction should be set forth in a written agreement between the parties, commonly referred to as a settlement agreement. Lenders generally have the upper hand in negotiating the agreement, since the lender has the power to refuse to take the property back or to release the borrower from personal liability on the mortgage debt.
The agreement should not be structured so that a deed is placed in escrow until certain conditions are met, as this may be challenged as an equitable mortgage, and the borrower might claim that a foreclosure is required to enforce the provisions of the agreement. In addition, title insurance coverage may not be available for such an escrow arrangement. The agreement should describe the consideration for its execution, which usually consists of the lender's agreement to cancel the borrower's indebtedness, waive any right to immediately foreclose the mortgage and to exercise any other remedies, and release the lien of the mortgage unless no merger is intended.
The agreement should contain an acknowledgement by both parties that the value of the property plus any additional consideration the borrower may deliver to the lender is less than or equal to the outstanding indebtedness plus any additional consideration the lender may provide to the borrower. Under certain circumstances, a voluntary conveyance may be accepted even if the value of the property exceeds the debt; however, there is a greater risk to the lender in such a situation that the transaction will be set aside if the borrower subsequently files bankruptcy or makes a claim of duress or unfair advantage.
In addition, the title insurance company will likely raise exceptions for those matters. If the lender intends for any person liable for the mortgage debt to remain liable after the lieu deed transaction, the settlement agreement must expressly so provide. If the borrower is not released from personal liability, the borrower, and any guarantor, will remain liable for the mortgage debt or even for a deficiency when the lender later sells the property.
Under the Illinois Mortgage Foreclosure Law, a deed in lieu of foreclosure does not automatically cause a merger of the lender's interest as lender and the lender's interest as purchaser of the property. The intention and interest of the lender will determine whether a merger takes place. The borrower ordinarily prefers a merger, since that extinguishes any outstanding liability on the mortgage debt.
The lender, however, usually seeks to avoid a merger in order to preserve the priority of the mortgage as to mechanics' liens and other encumbrances, and to preserve the lender's first lien position if the deed is later set aside. A provision as to the parties' intent concerning merger should therefore be included in the settlement agreement and the deed. In order to protect itself, the lender may refuse to release the mortgage of record after the voluntary conveyance until the property is subsequently conveyed or transferred by the lender.
Given debt forgiveness on 1st and 2nd lien — both with same bank.
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We have to make a decision this morning by noon latest. CST Just found yr site trying to decide on answer to them. Hi Colin ,, due to circumstances out of my control, I got behind several months on my mortgage.
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My home has gone into foreclosure , however it has been suspended for 2 months. I was told by my agent, that this is the best route for me. Is this the best route for me and will I be able to purchase another home? Thank you. I never miss any monthly fee at my mortgage. What is the best way to do, will I do the short sale or the Deed in Lieu.
The difference between the money that I own is 5K only. OK than thanks, so that means I can not buy the townhouse that I like since I still have my condo unit. Any advise for me? Lenders these days tend to require that you qualify for both payments existing home and new home if you try to buy a second property while still holding the original property, unless you have significant equity in the first property.
This is how they avoid borrowers buying and bailing. Good luck.
Short Sales vs. Deeds in Lieu of Foreclosure | Nolo
Hello, I am upside down on an investment property for which I am unable to rent or sale. Previously, the mortgage company offered me a 3 year loan modification at a lower interest rate, which just ended. I have asked for an additional one but was told it is unlikely. I have been unable to secure a refinance on this loan and cannot afford the monthly payment.
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Conventional Loan Home Prices vs. Mortgage Rates Pre-Qualification vs. Pre-Approval Mortgage Brokers vs. Banks Mortgage Rate vs. Buy Calculator. Deed in Lieu of Foreclosure vs. Short Sale Last updated on April 10th, What Is a Deed in Lieu of Foreclosure? Compare Top 10 Mortgage Refinance Options. About the Author: Colin Robertson Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years. Neal Trice February 24, at pm -.
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