If you find yourself in financial trouble, you may find that you have to proceed with foreclosure. Sadly, this is becoming more common within the US with some studies stating that around one in every 200 homes is due to face foreclosure at some point in the future.
Thousands of people have to proceed with foreclosure every year to find a solution to their issues with the projections estimating around 250,000 families every three months.
With an uncertain housing market and unclear mortgage rates and deals, foreclosure should always be looked at as a last resort option due to the severity of the situation. However, you may be wondering whether you can give your house back to the bank in a bid to avoid having to foreclose your property.
In this guide, we’ve gathered everything you need to know when it comes to foreclosure and what your options are in terms of asking the bank to step in.
The answer to this question is yes, you can give your house back to the bank to avoid foreclosure in a process known as deed in lieu of foreclosure. Before pursuing this option, first look into a short sale, loan modification, or simply selling the property.
If you have come up against a wall and have no other option, this process lets you sign a deed over to the bank to rid yourself of the house. This will cancel your remaining balance so you can move on with your life.
Pros of a Deed in Lieu of Foreclosure
Why should you consider giving your house back to the mortgage company this way? The foreclosure process is long and stressful, and this process allows you to skip it.
You also have the option to avoid the fees and expenses of foreclosure, and it’s the faster way of the two to get out from under the debt and move on with your life.
Finally, deed in lieu of foreclosure does damage your credit, but not as badly as a foreclosure.
Cons of Deed in Lieu of Foreclosure
So with all of those pros, why would you not consider this route?
First, if there is another way to get out of your debt, such as selling your home traditionally, you can avoid a ding on your credit. Though the hurt is less than the foreclosure would be, deciding to give a house back to the bank does create a negative effect on your credit rating.
If you have a deed in lieu of foreclosure on your credit history, you will have to wait several years before you can get another mortgage.
Typically the waiting period is four years, but this is better than the seven years with a foreclosure. Finally, perhaps the most obvious and severe consequence of a deed in lieu of foreclosure is that it will lead to monetary loss.
Your debt will be canceled, but in exchange, you have to surrender your home, including what you put into it for renovations and appreciation it has acquired.
You could consider completing your deed in lieu of foreclosure. This may sound easy to do but it is actually quite a tricky process to follow. If you decide to go down this route then you need to make sure that you are doing so before the foreclosure has begun. So how do you do this? Here is how you complete a deed in lieu of foreclosure:
1. Putting your home on the market
The first step is to put your home on the market even if you know it isn’t going to sell. This will show the bank that you are willing to do whatever it takes to solve your financial problems.
It’s important to bear in mind that the bank won’t agree to the deed in lieu of foreclosure unless there is no alternative available aside from foreclosure itself.
2. Looking at your mortgage statement
The second step in the process is checking your mortgage statement to confirm that you are struggling to make your payments and how much you need to pay back. This will mean that you have information that is up to date and therefore providing more accurate information.
The bank needs this proof in order to recognize that this is the last resort and that you actually need this process to happen to forego foreclosure. On average, you should be a minimum of 30 days behind in payments.
3. Providing proof of your financial statements
Once you have checked your financial statements, provide as much proof as possible by accumulating as much accurate documentation that you have. The most important piece of financial information needed is your most recent payslips.
This could be your last 2 or 3 months worth of payslips as well as any bank statements that can outline what your outgoings are. This will give the bank a clear indication of how much income you are receiving and where that money has been going.
4. Writing the hardship letter
Now you have to write what is called a hardship letter. This letter will explain to the bank why you cannot afford to make your payments.
Whether this is due to an illness or job redundancy, you must explain in as much detail as possible why the situation has changed and how it has affected your finances in such a severe way.
5. Wait for the lender to make their decision
Once you have completed the above, it is time for the bank or lender to come to their decision. Using the information that you have provided, the bank will perform what is known as a title search to ensure that you don’t have any additional mortgages or other obligations.
Bear in mind that you have a higher chance of approval if this is your first mortgage and that if you have any additional mortgages then this chance is dropped drastically.
