What is a Deed in Lieu of Foreclosure (DIL)?
A Deed in Lieu is an agreement executed between you and your mortgage servicer that allows you to hand the deed of your property back to your mortgage servicer in exchange for the mortgage servicer not foreclosing on you.
A Deed in Lieu is a good option for you if…
- Your property is underwater (you owe more on the mortgage than your home is worth): If your home is not underwater, then you can complete an equity sale of your property to get your money out of the property. It would not make sense to do a DIL if you have equity in your home so a DIL is only appropriate if you cannot sell your home and fully satisfy your mortgage.
- You only have one mortgage on the property (you have no 2nd mortgage or subordinate liens on Title): A DIL only resolves the first mortgage – it does not resolve any junior lienholders so it’s not a good idea to do a DIL if you have other debt attached to the home. If you do have other debt attached to the home, you’d want to find a different solution like a short sale or a Bankruptcy.
- Your financial hardship is not going to recover: Your financial hardship is permanent and you are ready to downsize to a more affordable living situation.
How do I apply for a Deed in Lieu of Foreclosure?
To apply for a DIL, you have to submit a loss mitigation package to your lender’s loss mitigation department.
The package consists of:
- Your lender’s loss mitigation application
- A hardship letter
- Supporting financial documentation
Your hardship letter should expressly state that your financial hardship is permanent, that you do not want to keep the property and that you do not expect your income to recover.
How can I help my DIL application get approved?
To get a DIL application approved, you need to show the lender that your financial hardship is seriously impacting your household income. You also want to prove to the lender that your financial hardship is permanent.
The easiest way to prove to the lender that your financial hardship is serious and permanent is to show them that your expenses outweigh your income.
If you have too many expenses and not enough income, it will be clear to the lender that you cannot afford a home retention option or resume a regular mortgage payment.
What happens to the deficiency balance after I do my DIL?
You should only accept a DIL agreement with your bank if the agreement has “deficiency waiver language” in the agreement – meaning, you should only complete the DIL if the bank states in writing that they will NOT pursue you for any remaining difference between the value of your home and the outstanding mortgage balance.
This is common practice and deficiency waivers are usually part of the DIL process but it is always good to have an attorney review your DIL documents to ensure that the bank cannot come after you for any remaining balance following the DIL.
What’s the difference between a DIL and a short sale?
A short sale is also a way of transitioning out of an underwater property, avoiding foreclosure, and settling the deficiency balance with the bank but there are a few notable differences:
- A short sale settles ALL liens and mortgages on Title so this process is used as a way to resolve ALL debt attached to the home, not just the first mortgage
- A short sale involves real estate agents and a fair market sale of the home to a third-party buyer (instead of just giving the property back to the bank).
- A short sale takes a longer amount of time to complete. Due to the many parties involved and the process of securing a buyer, a short sale is a longer process. Depending on your goals, you may want more time in the home before you transition out (which would make a short sale a better option for you). If you want to leave quickly, a DIL may be better for you.
(Learn more about my short sale negotiation services)
Can I get a relocation incentive as part of the DIL process?
A “relocation incentive” is money paid to you from your mortgage lender to encourage you to complete the DIL and to help with moving expenses. If you get approved for a relocation incentive, you will receive a check after you execute the DIL agreement.
Whether you qualify for a relocation incentive depends on who your investor and mortgage lender is. For many of the government-backed investors (FHA, VA, Fannie Mae, Freddie Mac, USDA), you can receive $1,500 – $3,000 in relocation funds if you choose to do a DIL and occupy the property at the time of the DIL.
Why would a bank agree to do a Deed in Lieu of Foreclosure?
Executing the foreclosure process costs mortgage lenders money. A DIL provides the bank a way to recoup the property without having to spend the costs associated with foreclosure.
If you’re a Washington state homeowner and are wanting to know if a Deed in Lieu option may be right for you, feel free to reach out for a free consultation at (425) 654-1674.
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