Thousands of Canadians have a tough time making their mortgage payments in full and on time each month, placing them in a position of default and inching themselves one step closer to foreclosure. It’s an unfortunate situation that many homeowners have found themselves in for whatever reason. Perhaps they took out a much larger mortgage than they could comfortably afford over the long run, or maybe their finances took a significant hit. Regardless of the reason for defaulting on a mortgage, missing a couple of payments can flag your lender and put you in a risky position to potentially lose your home.
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However, perhaps there’s a way to avoid foreclosing on your home if you’re finding it difficult to keep up with your mortgage payments. A ‘deed in lieu of foreclosure’ could potentially be a means of avoiding going into full foreclosure. As foreclosure can have a detrimental impact on your credit standing and financial reputation, it’s best to find a way around it however you can.
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What is a Deed in Lieu of Foreclosure?
Simply put, a deed in lieu of foreclosure is a process whereby you agree to voluntarily hand over the deed to your home to the lender instead of going through the long and arduous process of foreclosure. You will still need to vacate your home, as you would have to if the property was foreclosed, and the lender can then sell the home without having to involve the courts to get you to leave.
By submitting all of your interest in the home to the lender, you’ll be able to satisfy the mortgage that’s in default and avoid any painful and damaging foreclosure proceedings. The process of completing a deed in lieu of foreclosure varies a little from one lender to the next. It usually starts off with the homeowner falling behind on their mortgage payments, after which they and lender negotiate a deal whereby the homeowner vacates the property, leaving it in good condition. All rights to the home are then signed over to the lender.
The homeowner will likely be required to provide proof of income and their financial information, as well as proof to support the fact that property hasn’t or can’t be sold for what is still owing on the mortgage when attempting to sell at fair market value. Once the homeowner signs the deed in lieu documents, the process is completed.
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What Are the Benefits of a Deed in Lieu of Foreclosure Over Foreclosure?
As part of the deed in lieu of foreclosure process, your lender will forgive any part of the mortgage that they might not be able to get back, after selling the home. In the case of a full foreclosure, the bank could sue you for any amount that they were unable to recoup if the home sells for less than what you owed on the mortgage. In this case, a deed in lieu of foreclosure can help you avoid any ugly lawsuits. This process is also less damaging to your credit rating compared to a full foreclosure. Your credit score might still take a hit, but perhaps not as much as it would with a full foreclosure. Repairing your credit can take a long time, often many years.
After a formal foreclosure, you’ll find it a lot more difficult to get approved for other types of loans, credit cards, an apartment lease, or another mortgage. A deed in lieu of foreclosure will stay on your credit report for seven years, but you should still be able to buy a home two or three years after you complete your deed in lieu of foreclosure.
Perhaps the biggest benefit of a deed in lieu of foreclosure is that it closes out your mortgage right away. As such, you’ll have saved the hassle of having to go through the full foreclosure process. Not only that, you could potentially be offered better terms compared to formal foreclosure. A deed in lieu of foreclosure is not just beneficial for you, but also for the lender. From their perspective, lenders view a deed in lieu of foreclosure as a better alternative to foreclosure because it can save them a lot of time, hassle, and money. It also protects them should you be one of the few cases where the homeowner of a foreclosed home vandalizes the property before vacating it.
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What Can Stand in the Way of a Deed in Lieu of Foreclosure?
While there are certainly some advantages to a deed in lieu of foreclosure over a full foreclosure, there could be times where this process is not possible. For instance, if there are multiple loans on the property, a deed in lieu of foreclosure may not be an option. In this case, the other lender(s) will probably not agree to this process because they will almost certainly lose out on any monies that are owed to them. Sometimes the primary lender might also prefer foreclosure as it gives the title a clean slate.
What Can You Do to Avoid Foreclosure?
If you’re having trouble keeping up with your mortgage, you need to take action right after the first missed payment. One of your best options is to contact your lender right away. You might be able to work something out with your lender that will help you curb the foreclosure process. Often lenders will be open to working with you to avoid foreclosure, as this process is also burdensome for them.
If you can’t come to an agreement with your lender, consider getting in touch with a credit counsellor. These entities can offer a number of services, including one-on-one counselling and debt management programs that can help you open up more funds to be put towards paying off your mortgage without defaulting. There are both non-profit and for-profit organizations available that offer credit counselling services. It’s important to make sure that you look into the credit counselling company that you’re considering working with and ensure that they are qualified and trustworthy. In addition, find out if there is a cost associated with these services, and if so, how much.
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The Bottom Line
Foreclosure is never an enjoyable time for homeowners, and as such, finding an alternative to this onerous process can save a lot of time and stress. A deed in lieu of foreclosure can leave you in a slightly better position compared to going through the full foreclosure process. While you’ll still have to hand your home over to the bank, you’ll be left in a better position to become a homeowner once again in a shorter amount of time.