Financial troubles could be in store for thousands of homeowners if the dire foreclosure forecasts come true. But homeowners facing foreclosure do have options, says Judon Fambrough, a lawyer with the Real Estate Center at Texas A&M University.”They can pay off the debt before the foreclosure sale begins, refinance the debt with another lender, or sell the property and pay off the debt,” he said. “However, these options may not be practical for homeowners who lack funds, good credit, or the time necessary to sell the property before foreclosure.”
Fambrough says another, lesser-known option is available. The homeowner can request a deed in lieu of foreclosure (DILF).
A DILF conveys the property back to the lender in exchange for cancelling the debt. The lender’s consent and cooperation are required. DILFs offer several advantages over traditional nonjudicial foreclosures under deeds of trust, the most significant of which is that the homeowner’s credit is unaffected.
In addition, Fambrough says DILFs are quicker, requiring fewer than the minimum 41 days needed to foreclose on a home under a deed of trust. DILFs are also more confidential and less expensive.
“The major costs of a DILF are deed preparation and the recording fee,” Fambrough said. “But lenders may require the debtor to pay for a title search and an appraisal before agreeing to the DILF.”
The title search determines whether there are other liens on the property, and an appraisal substantiates the property value. Often, if a property has more than one lien, or if the property value does not greatly exceed the amount of the debt, lenders will not agree to the DILF.
Under certain circumstances, a lender can void the arrangement or foreclose even after agreeing to a DILF.
“The arrangement could be voided if there was a lien or encumbrance on the property that the homeowner did not disclose or that the lender had no knowledge of,” Fambrough said.
Fambrough points out that, in some cases, homeowners may find foreclosure a more attractive option than a DILF.
“If the property value exceeds the debt, and the debtor decides to foreclose, any excess revenue generated by the foreclosure sale will go to the debtor,” he said. “This is not the case with a DILF. Debtors forfeit their equity.”
Before executing a DILF, Fambrough recommends the homeowner talk to a financial advisor about possible income tax consequences that could result from the debt forgiveness.
