What Does Deed-in-Lieu Mean?
It means a deed instead of foreclosure. Simply stated, it means the borrower will voluntarily give the lender a deed to the property in order to avoid foreclosure.
Why Would I Voluntarily Give Up Title?
Traditionally, the reason to give a DIL was to minimize the damage to the borrower's credit score in an incurable default situation. The DIL transaction will have an adverse impact on credit scores, but not as severe as foreclosure. Today, if the lender is participating in the HAMP and HAFA programs, there are more reasons to consider a DIL. Under HAFA, the borrower will be paid a cash incentive at closing for transferring the property through the DIL. The exact amount of the cash incentive will be determined by the lender under the HAFA program guidelines.
How Do I Qualify for a HAFA Deed-in-Lieu?
First your loan servicer and loan owner must be participants in the HAMP/HAFA program. If so, and if you have been solicited for a HAMP loan modification but chose not to participate, or did not qualify for a trial plan, or defaulted on the trial plan, or missed two or more consecutive payments after receiving a HAMP modification, you qualify for a HAFA DIL or Short Sale plan.
What Would Disqualify Me From a HAFA Deed-in-Lieu?
The most common disqualifying circumstance is a second mortgage or additional liens, such as contractors' liens, judgment liens, or municipal liens. Depending on the amount of the lien, the lender may be willing to negotiate with the lien holder to accept a reduced payment. The borrower would be responsible for that payment. The lender has no obligation to negotiate or to pay off liens or to accept a deed-in-lieu when there are additional liens. In a foreclosure, all liens recorded after the foreclosed mortgage was originally recorded are wiped out; in a DIL transaction, they survive and must be paid off. That is why lenders are neither obligated nor willing to accept a DIL on a property with additional mortgages and/or liens.
Will The HAFA Deed-in-Lieu Completely Wipe Out My Mortgage Debt?
Under HAFA, the lender may not require you to pay any amount at the closing and may not require you to sign a note for any balance remaining or take other collection action. The DIL is the complete termination of your loan obligation. DIL transactions not under HAFA are not subject to these limitations - the borrower should have a clear understanding of these possibilities of continuing liability in a non-HAFA DIL transaction.
The Deed-in-Liu is a useful tool in some circumstances and the HAFA program makes it more attractive than before by adding cash incentives and eliminating post-deed liability. In non-HAFA situations, the borrower must carefully negotiate these points to ensure that the DIL represents the end of his mortgage loan liability.