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Loan Mod & Options

What is a Deed-in-Lieu of Foreclosure?
A deed in lieu of foreclosure is a deed instrument in which a mortgagor (the borrower) conveys all interest in a real property to the mortgagee (the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.

The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of repossession, and 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 outstanding indebtedness of the borrower exceeds the current fair market value of the property.

Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they 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 obligated to proceed with the deed in lieu of foreclosure until a final agreement is reached.

How do I qualify for a deed in lieu?
Deed in lieu of foreclosure is, in effect, giving your property to your lender in exchange for cancellation of your mortgage. It is sometimes also referred to as “Cash for keys”.

In a recent policy statement (mortgagee letter 2002-13) HUD authorized lenders to pay FHA borrowers up to $2,000 for a Deed in Lieu of foreclosure on the condition that the occupant peacefully vacates a property for which the mortgage has been foreclosed and the property is left broom clean. Some conventional loan lenders are offering similar incentives to homeowners.

If you are approved for a Deed in Lieu, you will deed the property over to your lender in exchange for a release from the obligation to repay your mortgage. Your lender may also waive their deficiency judgment rights. If not, you could still owe your lender money after they have “fixed up” and sold your property.

There may be tax consequences of a Deed in Lieu transaction. A qualified tax professional should be consulted to determine the impact this may have in your case.
Lenders will consider accepting a Deed in Lieu transaction when the other options are not possible. Generally, lenders expect the following conditions to be met in order to consider offering a homeowner a Deed in Lieu solution:
  • You have experience a long term financial hardship that has not been resolved.
  • Your house has been on the market (at fair market value) for at least 90 days.
  • There are no additional claims or liens (other than the first mortgage) against the property.
  • The house is broom clean.
What is Forbearance?
In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower in order to delay a foreclosure.

Loan borrowers sometimes have problems with their payments due to unexpected circumstances. This may cause the lender to start the foreclosure process. To avoid this situation, the lender and the borrower have the option to make an agreement called “forbearance”. According to this agreement, the lender delays his right to exercise foreclosure if the borrower could catch up his payment schedule in a certain amount of time. This time period and the payment plan depend on the details of the agreement which are accepted by both of the parties involved.

Note that forbearance is just for “temporary” financial problems. If the borrower has more serious problems, for example if it is a variable-rate mortgage and the interest rate becomes high enough so that the borrower cannot afford the payments anymore, then forbearance is usually not a solution.

What is a Loan Modification?
A loan modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford.

Types of Modification

Loan Modification – This is when the lender modifies your current mortgage in order to work with you and make your mortgage more affordable. In the past, this was only used when a borrower was delinquent but now it is being used before someone is delinquent. This will be the hottest term and way to help people avoid foreclosure. Loan modifications can vary in type mainly consisting of a rate change for the better, a principal reduction, sometimes the principal may increase if a second has been absorbed to get a lower payment, payment abatement where the behind payments are added to the end of the loan and finally an interest rate freeze usually for 5 years or more or a combination of all 4.

Forbearance – This is used most of the time, when a Notice of Default has been filed. You are allowed to delay or reduce payments for a short period, with the understanding that another option will be used at the close of that time to bring your account to a current status. Your lender, if in agreement, will then temporarily cease legal actions.

Repayment Plan – If you have incurred a short term financial hardship and your loan is two or more month past due, your loss mitigation specialist will also consider submitting a request for a payment plan to your lender for approval. Only after reviewing your financial situation will this option be considered. All clients must be able to show that they can afford this plan in order to be eligible.

Special Forbearance (FHA loans only) (Type I & II) – If you have incurred a short term financial hardship and your loan is 90 days to 365 days past due, the loss mitigation specialist will also consider submitting a request for a special forbearance. A special forbearance is designed to provide you with more relief than is possible with a regular repayment plan. Typical approval can result in spreading the repayment over 12 to 18 month. Type II – can be utilized in an unemployment situation whereby the promise of future employment is present.

Partial Claim (FHA mortgages only) (Some Freddie Mac investor loans) – The loss mitigation specialist may assist in requesting a partial claim if you qualify. You may be eligible if your loan is 120-365 days past due. A partial claim results in placing your past due payments into a subordinate mortgage (2nd mortgage) between you and the Secretary of Housing Urban Development. The partial claim note will require you to start making payments when you pay off the first mortgage. There is no interest. The partial claim can be for no more than 12 months of past due payments.