Why lender would rejected Deed in Lieu of Foreclosure
Here are a few reasons why a bank might refuse a deed in lieu:
- Such action is not profitable for the bank. If a bank believes it can make more money through foreclosure, either because the property has equity or the federal government is providing financial incentives to the bank to foreclose
- Junior encumbrances, judgments, or tax liens. Any subsequent lien filed against the property will stay with the property and become the lender’s responsibility if not released prior to the agreement for a deed in lieu of foreclosure. Typically, a property with only one loan is the best candidate. Or, a second lender might accept a deed in lieu if the first loan is current and the property is worth more than the sum of its encumbrances.
- Servicing guidelines prohibit deeds in lieu. Many loans are serviced by PSAs, and the guidelines in those PSAs might prohibit a deed in lieu of foreclosure. PSAs are required to follow guidelines and those terms cannot be altered.
- Unacceptable terms. It is also possible that the PSA might ask the borrower to make a financial contribution in exchange for acceptance of the deed in lieu, and the borrower might refuse either due to principle or lack of principal.