When you're at risk of losing your home, agreeing to transfer it to the bank through a deed-in-lieu allows you to forgo the foreclosure process, and you may receive monetary incentives from your lender for cooperating. A deed-in-lieu affects your life in several ways, but knowing in advance what to expect afterward can help ease the transition into more affordable housing.
The effects of a deed-in-lieu of foreclosure on your living situation are dramatic. You must move out of the home within a specified amount of time after signing the deed over to your bank. The approval process for a deed-in-lieu may take your bank 90 days or more, but once approved, you may have as few as 14 days -- depending on the law in your area -- to move out.
The lender determines what happens to your home after the deed-in-lieu. The lender is responsible for maintaining the property, preparing and selling it to recoup losses. It may sell the home at public auction or hire a real estate broker to put the house on the market and manage its sale. It is not uncommon for a home to remain vacant and off the market for a period of time, either. The lender may sell the home at a later date if it anticipates a faster sell or better sale terms.
Your credit will take a hit after a deed-in-lieu of foreclosure. Your lender reports the loan delinquency each month that you are late and reports that your account is settled with a deed-in-lieu. A defaulted mortgage and the impact of having an account reported as "not paid as agreed," can be just as devastating to your credit score as foreclosure. The time it takes for your score to recover depending on how well you maintain all other credit accounts. The deed-in-lieu usually prevents you from getting a new mortgage for several years. The Federal Housing Administration, which has relatively lenient credit-qualifying standards, requires you to wait three years before getting an FHA loan.
A deed-in-lieu allows you to recover financially from the burden of a mortgage you cannot afford. It can prevent you from depleting your savings, running up credit card balances and risking your ability to contribute toward retirement. Some lenders offer cash incentives for a deed-in-lieu and may also pay off other liens on the property. Your lender may report the deficiency, or the difference between the amount owed and the amount recouped, to the IRS. However, you may not have to pay income taxes on the deficiency due to the Mortgage Debt Relief Act of 2007, which is valid through the end of 2013.
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