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Drawbacks to a Deed in Lieu of Foreclosure

Drawbacks to a Deed in Lieu of Foreclosure

Always seek legal advice before jumping at the bit to give the bank a deed in lieu of foreclosure. Remember, it is in the bank’s interest to obtain the deed from you. It might not be in your best interest to comply. In some ways, it can be argued that giving a bank a deed in lieu of foreclosure is just a step above walking away from your mortgage. Following are a few ways you could be affected with a deed in lieu of foreclosure:

  • It will affect your credit. A deed in lieu will show up on your credit report. Some sources say the affect on credit is identical to that of a full-blown foreclosure. Each individual’s situation is different. When in doubt, call a credit bureau and ask.
  • Ability to buy another home. TFannie Mae and Freddie Mac, that buy loans in the second market will not buy a mortgage made by a borrower who signed a deed in lieu for four years without extenuating circumstances, two years with extenuating circumstances.
  • Compare the wait to buy after a foreclosure, which is seven years without extenuating circumstances, five with, and what you have picked up is essentially a three-year gain. Looking at it another way, a short sale may qualify you to buy a home within two years, in which case you may have lost two years if you are forced to wait four years after a deed in lieu.
  • Release of liability. Make sure that the deed in lieu specifically releases you from liability to repay the loan. Moreover, there is little point in handing over title if you have a second lender that will pursue you for a deficiency.
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