One alternative to filing foreclosure is doing a deed in lieu of foreclosure (DIL). One benefit, amongst others, to a DIL is its general anti-deficiency characteristics. Only about 5 percent of lenders in California pursue borrowers for deficiency liabilities after deeds in lieu of foreclosure.
Deeds in Lieu in California
Lenders that foreclose on properties without going through the courts are usually prohibited from pursuing borrowers for future liabilities.
Recently passed California law also prevents lenders accepting short sales from pursuing borrowers for future liabilities that result from those short sales.
Issues in California
California law presumes that lenders who accept DILs will release their borrowers from future financial liabilities but lenders often require those borrowers to attempt to sell their homes first before offering a DIL. Mortgages in California that do not contain a “no deficiency” provision are still subject to deficiency judgments after foreclosure, short sale, or DIL. A deficiency in a mortgage is determined as the negative difference between what a property is worth and what is still owed on it.
Lenders in California are often hesitant to accept DILs. Additionally, lenders usually won’t approve DIL offers if borrowers have second mortgages or other security interest liens on the property. Because of the damage that can be caused to the borrower’s credit, foreclosure should be pursued only if all other options have been exhausted.
Recommendations for Deeds in Lieu
If you’re considering a deed in lieu of foreclosure it might be helpful to contact your lender or an experienced real estate attorney, or both. Make sure to get any lender waiver of future deficiency liabilities in writing if the lender agrees to accept your offer of a DIL. It might be best to try to do a short sale if a lender accepts your DIL but won’t waive future deficiency liability pursuit. Bankruptcy can discharge debt related to deficiency liabilities that arise from DILs, but it should be considered a last resort.