Homeowners that are facing foreclosure may wish to avoid the process altogether, either by using a short sale or a deed in lieu of foreclosure. These alternatives can be advantageous to both the homeowner and the lender, however, negotiations should be handled carefully by an experienced real estate attorney.
When to Hand Over the Deed in Lieu of Foreclosure
For the lender, foreclosure is a costly and time-consuming procedure. It also results in the lender taking back the property. The lender would prefer to be making money off the property rather than owning it and having to resell it. This is one reason that lenders may accept a short sale—it lets them avoid taking back the property.
The deed in lieu of foreclosure can still be an attractive option to the lender if foreclosure is inevitable. The lender may ask the homeowner to attempt to sell the property first before agreeing to take the property back because the lender would rather avoid the process of selling the house. If the homeowner can’t sell the home after a certain period of time, the lender may take it back.
For the borrower, the deed in lieu of foreclosure may do less damage to their credit rating, although this will depend on each borrower’s specific financial circumstances. The key negotiating point from a borrower’s perspective will be getting the lender to agree to waive any deficiency balance.
Deficiency Judgments for Deeds in Lieu of Foreclosure
If your home is worth less than the balance of your mortgage loan, the lender has the ability to go after you for the remaining balance after a foreclosure. However, Arizona law limits the lender’s ability to seek a deficiency in certain cases, as codified in A.R.S §§ 33-729 and 33-814.
If your property was 2.5 acres or less and contained either a single family dwelling or a single two-family dwelling, the lender will not be able to seek a deficiency judgment. They can foreclose on your house, but they cannot come after your other assets. They can’t put a lien on your other property or seize it using a court judgment.
A deed in lieu of foreclosure does not offer this protection. You must get the lender to explicitly agree to waive the deficiency, or you will be at risk for a deficiency judgment which is enforceable by a court order. For this and other reasons, it’s important to consult with a real estate attorney before completing a deed in lieu of foreclosure or short sale.
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us to discuss your case with an experienced real estate attorney.