Advice on voluntary surrender of home to lender

BILL'S ANSWER

The voluntary surrender of a home in the manner you describe is often referred to as a "deed in lieu of foreclosure" in the mortgage industry. In this procedure, a borrower negotiates with the lender to turn over the deed to the lender in order to avoid formal foreclosure proceedings in the court system. I will explain more about voluntary surrender of a home in just a moment.

I generally recommend negotiating a deed in lieu agreement when a homeowner can no longer afford his mortgage payments, has explored all other options to save his home, and when foreclosure is imminent.

It sounds like you are able to make your monthly mortgage payments, but that you would like to rid yourself of the home so you can move. Before you consider surrendering the property to your mortgage lender, you should do everything in your power to sell the home. If you can find a buyer, you should be able to rid yourself of the home without the credit damage caused by a foreclosure or a deed in lieu. For further information about foreclosure, you should review the foreclosure information from the US Department of Housing and Urban Development.

Unfortunately, in the current housing market, many homeowners find themselves owing more on their mortgages than their homes are worth, a situation which the mortgage industry refers to as being "upside down" on a mortgage. Even if you cannot find a buyer willing to pay enough for the home to pay off what you currently owe, you still may be able to sell the property for less than the mortgage balance, though you will need to negotiate an agreement with your lender to accept less than the balance of the note to pay off the mortgage.

Selling a home for less than the balance owed on the mortgage is often called a "short sale." Such transfers must be approved by the lender prior to the sale. Lenders that agree to short sales will frequently forgive any balance remaining on the note after the sale proceeds are applied, though they usually require borrowers to provide documentation of financial hardship, such as job loss or unexpected illness, before they will approve a short sale.

Surrendering your home to your mortgage lender through a deed in lieu of foreclosure agreement will likely have a strongly negative impact on your credit rating and your ability to obtain a new mortgage. While I understand that your credit score is already quite low, it is possible that a voluntary surrender may drive your score even lower. In addition, this derogatory mark on your credit will likely appear on your credit reports for seven years, meaning that this "foreclosure" could damage you credit rating for much longer than your dismissed bankruptcy.

Recommendation

Explore all options available to you to avoid voluntary surrender or foreclosure of your home, as losing your home will likely hurt you financially and negatively impact your credit rating for many years. These credit problems could prevent you from qualifying for a mortgage for a new home, cause you problems leasing an apartment, and force you to pay significantly higher interest rates for any credit you are able to obtain, which could cost you thousands of dollars in interest charges.

To learn more about the foreclosure process, and possible ways to prevent foreclosure, I encourage you to visit the Bills.com Foreclosure page. See also Deed In Lieu Of Foreclosure vs. Short Sale and Home Affordable Foreclosure Alternatives Program.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (158)

George M.
Upland, CA  |  February 05, 2012

Hello. I have a rental property where I am extremely "upside down," and, just keep having problems with renters. My wife and I are considering DIL, though, the only "hardship" I can cite is that overtime has slowed. Fortunately, my wife and I are blessed with good jobs, but, this property has been a headache.

(0)

Bills.com
February 06, 2012

I suggest that you read the Bills.com article about deed in lieu of foreclosure vs a short sale. If you stop payment, then your loan will go into default and you most likely the lender will foreclose on the property and seek the deficiency balance through a court judgment. If you wish to do a short sale of DIL, then you will need the permission of the lender. If you are strong borrowers, the lender will most likely demand that you pay the whole loan, through the sale and a payment plan. You can attempt to negotiate the deficiency balance. Another possible solution is to hold on to the property, seek better tenants, and more security from your tenants. Run credit, employment and past rental history checks on your tenants.

(0)

Matt W.
Rolesville, NC  |  February 02, 2012

My wife and I have a house in NJ that is currently in the process of being sold through a short sale. We have met with bankruptcy lawyers and they have mentioned surrendering the house. If we were to surrender the house, we wouldn't owe any more money on it, correct? Also, if we did do the short sale and it went through, we would owe the difference of what we owed on the house and what it sold for, right?

(0)

Robin J.
St. Clair Shores, MI  |  February 01, 2012

My husband and I filed bk four years ago. We surrendered the property to the lender. The city continues to send us property tax bills and assessments. Are we liable for the taxes?

(0)

Bills.com
February 04, 2012

No. Send the city a Certified Letter explaining the facts of the surrender. Name names, and include all details regarding the contact information at the bank or credit union so that the city can follow-up with the appropriate people at the bank.

(0)

Heather M.
Canton, OH  |  January 31, 2012

Hi. My husband and I are in the process of moving out of our house. We are now 30 days behind on our mortgage. I found out that when we had our bankruptcy back in 2007 (discharged in 2008) that our house was not "reaffirmed" in the bankruptcy. My understanding is that we are no longer personally liable for our mortgage, and we can walk away from the property. There is approx. $20k in repairs that need done, then even after that, we are about $30k upside down, according to a Realtor that we talked to. My question is, when we walk away, should I: A) Let the bank take the property through foreclosure; or B) Try to negotiate a short sale? My thoughts are that both the bank and us benefit from a short sale. Them due to the costs, and us due to the timeframe. Like I indicated, I know we have no personal liability for the home loan, as it was included in our bankruptcy. Any advice is appreciated!

(0)

Bills.com
January 31, 2012

For most home owners, a short sale is superior to a foreclosure. However, if the home owner filed a successful chapter 7 where the home loan was included, then walking away is smarter financially. In a situation like yours, the only advantage a short sale has is that you can control exactly when you vacate the property. However, if you are already moving elsewhere, I see no financial or legal advantages to a short sale.

Consult with your bankruptcy lawyer to discuss the specifics of your circumstances and your options. You may have additional relevant facts you did not share that would lead you to a different conclusion than the one I shared here.

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Heather M.
Canton, OH  |  February 01, 2012

Another thought I have, is would we be better to do a deed in lieu, rather than a foreclosure? A DIL, would make the process much quicker, by getting the property into the banks hands faster, and they save the money on the foreclosure process. I am not sure if this is an option or not. Like I indicated, we are not personally liable for the financials on the property, as it was included in our bankruptcy in 2008. Thanks for your advice!

(0)

Bills.com
February 01, 2012

All other things being equal, a deed in lieu of foreclosure is a better deal for a borrower because it places the liability for the property on the lender as soon as the contract is executed. However, in life there is no such thing as "all other things being equal." A good short sale contract is better than a bad deed in lieu of foreclosure.

In your case, I would be leery of any contract I signed with the lender because it may have language that reinstates the loan or otherwise obligates you to any deficiency balance. Consult with a lawyer before you sign any contract the lender places before you, and ask him or her to review the contract before you sign it.

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Nikkie J.
Adelphi, MD  |  December 13, 2011

Greetings, I just filed for bk which will be discharged in 2/12. We did a "deed in lieu of foreclosure", as we cannot afford the home anymore because my husband has lost his job. My question, how long does it take for the deed to transfer from myself back to the bank. I signed correspondence that I do not want to keep the home and do not wish to renegotiate. We have already moved to an apartment but still need to get 2 big pieces of bulk furniture, what is the time estimate for when the bank actually comes to take possession of the house? Will I need to give the bank the keys or do they even care at this point? Thank you for reading and providing any insight.

(1)

Bills.com
December 14, 2011

If you have done a deed in lieu of foreclosure with your lender, that means that after meeting their eligibility requirements and approval, you have signed and notarized all bank papers. You will then have 14 calendar days, or the amount of time specified in local law, to move out of the property. Any questions you have should be directed to the lender, including eligibility for relocation expenses.

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Jaylen W.
December 09, 2011

Elegant description has been given. Good justice to the article.

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Ja C.
December 03, 2011

I have a question if I may. A company I co-owned was sued in 2007. The plaintiffs came after me personnaly. I had to declare bankrupcty. I opted to keep my house. It originally costs $255,000.00 to build. I had sold a home and put my equity down on this new home. I lived there 4 years priar to this suit. I owed $148,000.00 on the house. The lender started charging me $1,300.00 month in bankrupcty fees every month on top of my payments. I opted to take cash for keys and include it in the bankruptcy to forgo a foreclosure, I surrendered it. They sold it for around $300,000.00 and I did not get anything back. Again I only owed $148,000.00. Should I have at least gotten $15,000.00 back because of the Missouri homestead act? Thank you for your answer.

(0)

Bills.com
December 04, 2011

It is not clear to me why you declared bankruptcy with so much equity in your home and why did you not instigate the sale of the property on your own. As you did not state how much you owed from the lawsuit, perhaps you figured that the judgment-creditor would get all the proceeds?

I am concerned that you did not get an upfront explanation from your bankruptcy lawyer about the effects of filing BK. The homestead exemption in MO is only $8,000, so when your assets were liquidated to satisfy your creditors, only $8,000 is protected. Check with your bankruptcy lawyer, so you have a clear understanding of the exact sums that were owed to the bank and how the funds from the sale of any of your assets that were liquidated were distributed.

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Karen H.
Santa Clarita, CA  |  November 14, 2011

My mortgage was included in my chapter 7 BK that was filed in Sept., 2011. My BK was dischaged in October 2011. When should i receive a notice of default? Will this have the trustee sale date? I would ike to have an idea of when i need to be out of the house. Thank you.

(0)

Bills.com
November 14, 2011

If you wish to remain in the property and can afford your payments, then continue to do so! A bankruptcy in and of itself does not lead to an automatic foreclosure. Your bankruptcy lawyer should have explained this to you. If not, speak to him or her immediately.

If you cannot afford your monthly payments or otherwise wish to quit the property, then talk to your bankruptcy lawyer about the timeline for foreclosure in your state. Some are brief, and some are not.

(0)

Karen H.
Santa Clarita, CA  |  November 14, 2011

My BK atty., was the one that told me i would be receiving the NOD but he couldn't give me a definite date. My lender has also filed a Relief of Stay in Sept.

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