For many California homeowners, the prospect of foreclosure is terrifying. Borrowers who have been downsized out of a job, who have been forced to spend their income on medical emergencies, or who cannot keep up with escalating payments on an adjustable rate mortgage often feel helpless when they can’t make home loan payments.
Fortunately, borrowers may have options that will help them make the best of a difficult situation. The worst option is to do nothing. Deciding how to respond to the threat of foreclosure may seem like a daunting task, but armed with sound legal advice, you can plan a strategy that will help you manage your financial crisis.
One option is offering your lender a “deed in lieu of foreclosure.”
What Is A Deed In Lieu Of Foreclosure?
When you can’t keep up with your mortgage payments, the best option is often to sell your home and use that money to pay off the balance of your mortgage loan. However, many homes are now “underwater,” meaning they’re worth less than the mortgage loan – selling the home won’t pay off the full debt. If you can’t sell your home at a price that will pay off the remainder of your mortgage loan, you may be able to give your lender the deed to your home instead of going through the foreclosure process. It’s called a “deed in lieu of foreclosure.” If the lender agrees, you walk away from the home and your mortgage loan is considered paid. The lender will receive property that is worth less than the loan balance, but it will avoid incurring the expense and delay involved in a foreclosure.
Lenders won’t always agree to take the deed instead of foreclosing, especially if the home has been used to secure additional debts (like a second mortgage or home equity line of credit). They don’t want the burden of maintaining and selling homes – that’s not their line of business. So, lenders often require a homeowner to place the home on the market for a period of time before they will agree to accept a deed in lieu of foreclosure. They’ll also require you to disclose your income and assets and to provide other proof of the financial hardship that prevents you from making your mortgage payments.
Depending on the terms of the agreement you reach with your lender, they may or may not be entitled to pursue a deficiency judgment against you. The “deficiency” is the difference between the value of the home and the amount you owe and they may have the legal right to attempt to collect that amount. If they don’t pursue a deficiency judgment, you may also face unexpected tax liability. The amount of the loan that is forgiven may be considered part of your income for tax purposes.
To ensure that your rights are protected and that you understand the potential benefits and pitfalls of a deed in lieu of foreclosure, you should speak to an experienced local attorney before committing to a course of action.
Alternatives To A Deed In Lieu Of Foreclosure
If the market value of your home exceeds the amount you owe to your lender, selling your home might be the best way to protect your credit rating while relieving yourself of a debt you cannot afford. If selling your home at a price that will cover your mortgage is unrealistic or unattractive, a deed in lieu of foreclosure is just one of several options.
If you can no longer afford your loan payments but you could afford a reduced payment, you can try to refinance or to renegotiate your loan terms. Extending the length of the loan or finding a lower interest rate might result in more affordable payments, although you may need to pay additional sums of money up front if you refinance.
If temporary relief from payments will help you resolve your financial crisis, you might be able to negotiate a forbearance agreement with your lender. In exchange for the lender’s agreement not to pursue immediate foreclosure, you would agree to resume your monthly payments on a specified date and to pay the interest that accrues during the forbearance period. A lender will usually agree to forbearance only if the borrower will probably have the ability to make all remaining payments after the borrower’s short-term financial crisis is resolved.
A short sale is the sale of your home for less than your loan balance. You might persuade your lender to agree to a short sale if you made an unsuccessful attempt to sell your home for an amount that would cover your mortgage balance, if you have been unable to refinance, and if you can prove that you are suffering from a financial hardship that is unlikely to improve in the foreseeable future.
Lenders may find it advantageous to approve a short sale rather than investing time and money in foreclosure proceedings. California law prohibits lenders from seeking a deficiency judgment against the borrower after approving the terms of a short sale. If you have more than one lender, however, a short sale can present special problems. You should have your attorney review the terms of a short sale agreement to make sure you understand your obligations.
Chapter 7 Bankruptcy
Chapter 7 of the Bankruptcy Code allows debtors to wipe out their unsecured debts, freeing up cash for you to pay your mortgage. Your lender would be entitled to pursue foreclosure at some point after you file your chapter 7 petition, but your responsibility to pay foreclosure costs and any deficiency would be discharged.
If your home has no equity and you know you are going to lose it, Chapter 7 can be an attractive solution to your debt problem. It is often the best debt remedy for people who have few assets and overwhelming debt. Not everyone qualifies for Chapter 7, but it is usually available to people who lost their jobs or have a lower-than-average income.
Chapter 13 Bankruptcy
Chapter 13 of the Bankruptcy Code allows debtors to make a court-supervised debt repayment plan. You may be able to keep your home by filing a Chapter 13 bankruptcy. Filing a chapter 13 puts a stop to foreclosure proceedings, as well as all other debt collection efforts.
If you have enough regular income to make your current home loan payment, a Chapter 13 plan allows you to “catch up” on delinquent payments. It also relieves you of the burden of making monthly payments on credit card bills and other unsecured debt. That may free up enough income to allow you to make your monthly mortgage payment.
Is A Deed In Lieu Of Foreclosure Right For Me?
There is no “once size fits all” answer to that question. The answer depends upon a number of factors, including your income, the amount of your home loan payments, the amount of your home loan delinquency, the loan balance, the other debts you owe, your credit rating, and whether foreclosure is imminent. Your lender’s willingness to work with you is another critical factor. In some cases, a deed in lieu of foreclosure is the best way to get out of your mortgage debt. In others, you may prefer a different option.
If you’re struggling to make your mortgage payments, contact us today for a free case evaluation and consultation to learn about your options for dealing with mortgage debt. Even if bankruptcy is not the right option, we have a referral network of top notch real estate professionals that we can refer you to to solve your situation.