If you’re facing a foreclosure in Alabama, one option is to do what is called a deed in lieu of a foreclosure. In essence, this means you give the deed to the mortgage company instead of the mortgage company taking the deed through a foreclosure.
Here’s an example to illustrate this — Bob and Jenny and Wells Fargo.
Bob and Jenny have a house in Birmingham and they owe $300,000 on their mortgage to Wells Fargo. They have encountered financial difficulties and have not been able to get a loan modification and they are now facing a foreclosure.
Instead of allowing the foreclosure to occur, Bob and Jenny could work out a deal with Wells Fargo where they give the deed to Wells Fargo and Wells Fargo does not foreclose. Normally the way a company such as Wells Fargo obtains the deed is by conducting a foreclosure sale on the courthouse steps and then a foreclosure deed is filed with probate court.
A foreclosure deed is where Bob and Jenny deed the house over to the new purchaser of the home. Almost always this will be the mortgage company such as Wells Fargo. (Note: Bob and Jenny don’t literally sign the deed but that is done for them pursuant to the powers granted in the mortgage document.]
So the question is why would Wells Fargo do this?
There is some expense and time involved in foreclosing a house. A mortgage company may decide that it is easier and quicker to simply accept the deed from Bob and Jenny rather than hiring a foreclosure law firm, advertising the foreclosure, and then potentially suing Bob and Jenny to get them out of the house (what is known as an “ejectment” case).
Okay that makes sense but why would Bob and Jenny agreed to do this rather than forcing Wells Fargo to go to a foreclosure?
The advantage for the homeowners is that there is no foreclosure.
This can be important both from a credit reporting standpoint as well as when applying for a future loan — being able to honestly answer the question on the loan application about “have you ever been foreclosed.”
What are the important considerations for Bob and Jenny when deciding on whether to accept a deed in lieu of foreclosure?
**Will Wells Fargo say Bob and Jenny owe any money after the deed in lieu?
**What will Wells Fargo put on their credit reports?
**Do Bob and Jenny have a lawsuit they can file against Wells Fargo (often Wells Fargo will violate the law in the loan modification process)? Is it better to sue and stay or walk way with the deed in lieu?
A deed in lieu is not a perfect solution. But sometimes it is the best solution available.
Normally to get one, you have to show the mortgage company that you tried to sell your house, tried to do a short sale, and none of those worked.
Finally, a deed in lieu, a short sale, a loan modification, etc. are all part of what is known as “Loss Mitigation” which is the process of figuring out how to avoid a foreclosure on your home. This process is still difficult but new rules (RESPA) that bind these mortgage companies went into effect in January 2014 and can be very helpful to you.
If you live in Alabama and you are facing a foreclosure or considering a deed in lieu and you want to meet with us in person (or by phone/video), call us at 205-879-2447 so we can see if it makes sense to meet or you can contact us online through our website AlabamaConsumer.com.