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What is a deed in lieu?
The first question that one might have is what is done with the deed, and what is it in lieu of. Deed in lieu is just a short way of saying deed in lieu of foreclosure. This is done when a borrower is in default of a loan for a property. The borrower concedes the total value of the real property to the lender. In return, the lender will cease foreclosure proceedings, and a large portion or all of the loan balance that is owed by the borrower will be forgiven by the lender.
Deed in lieu, in many cases, can be beneficial to both the borrower and the lender for several reasons. The lender is able to avoid the labor and associated costs of a foreclosure proceeding. The lender is also partially protected if the borrower declares bankruptcy after the deed in lieu is executed. The borrower has the advantage of being released from a good portion or all of the debt of the defaulted loan. The borrower also has less damage to their credit as well as being able to avoid the stigma associated with the public disclosure of foreclosure proceedings. In addition, the borrower may be offered much better terms than that of a foreclosure.
There are several requirements that must be met for a deed in lieu to be considered as an option by the lender. Both the lender and the borrower are required to voluntarily enter into the deed in lieu transaction in good faith. As a result of this, many times the lender will not execute a deed in lieu without an offer in writing that states that the borrower is proposing to enter into negotiations for the deed in lieu voluntarily. This document protects the lender from future claims that the borrower pressured into negotiations by the lender, or that the lender entered negotiations in bad faith. A lender may also chose not to enter negotiations for deed in lieu if the appraised value of the property is less than the outstanding balance of the loan, or the property is Òunder waterÓ. However, this is not a deal breaker, because the lender may find the difference of these two values to be less than the labor and cost of foreclosure proceedings and thus decide to proceed with negotiations. Lenders may also be hesitant to enter deed in lieu negotiations because of junior liens that they find on the property when they do a title search. Also, the possibility of junior liens that are not discovered in the title search may surface later, and this possibility may discourage some lenders as well. The lender will sometimes prefer the option of foreclosure because a foreclosure auction usually results in all junior liens on the property being extinguished.
