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FHA Loans: Deed-In-Lieu of Foreclosure Rules

Borrowers having trouble making payments on their FHA mortgages are encouraged to contact the FHA and the lender as quickly as possible to discuss possible arrangements to help prevent the loan from going into default and foreclosure.

In some cases a loan forbearance may be possible or a refinancing of the FHA loan, but in more extreme cases the borrower may consider a move called deed-in-lieu of foreclosure, sometimes called deed-in-lieu for short.

A deed-in-lieu arrangement is for borrowers in default on their FHA loans who don’t qualify for any other HUD loss mitigation program. In essence, deed-in-lieu results in the borrower signing back the home to the mortgage company. FHA rules state that deed-in-lieu proceedings must be initiated within six months of the loan going into default, and there are circumstances where “a current mortgagor is eligible for the deed-in-lieu of foreclosure option” according to HUD guidelines.

FHA rules state there are certain requirements the borrower is required to meet in order to be eligible. Among the first items listed in the FHA’s information sheet on deed-in-lieu actions is that the borrower may be charged up to $2,000 as compensation to the lender.

FHA rules state the home in question must be owner-occupied unless there is documentation to prove loan default was related to the need to vacate the property. That need can include job loss, divorce or other circumstances. The borrower and lender must agree to terms in writing as to the condition of the property and the terms of the deed-in-lieu. Investment properties are not eligible for a deed-in-lieu agreement.

Once of the most important rules is connected to “walk aways”, or people who simply abandon the property and payments on the FHA loan. FHA requirements state that “under no circumstances” may a lender encourage the borrower to purposely go into default in order to take advantage of a deed-in-lieu of foreclosure option on an FHA home loan.

Borrowers looking into the deed-in-lieu of foreclosure option on their FHA mortgage loans are required to provide written explanation as to the circumstances and causes of loan default and may be asked to provide proof of income reduction or other hardship.

18 Responses to FHA Loans: Deed-In-Lieu of Foreclosure Rules

  1. Msteen says:

    Where does it state that if a homeowner is pursuing a DIL, that he MUST attempt to list and sell the property first? If he is upsidedown why would this be a requirement? Why do lender drag their feet for months, before reviewing the submitted hardship documents, then only to deny the request?
    Please share if you have any answers. thanks!

    • Joe Wallace says:

      Thanks for your question. For those who aren’t familiar with Deed-In-Lieu, according to the FHA: “A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from mortgagors who can financially make their mortgage payments.”

      There is a great deal of information on Deed-In-Lieu here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/faqnsctc

  2. C. L. Rhoad says:

    I have an FHA loan. I listed my house in Oct-2011 and maintained my mortgage payment through April 2012. In Dec 2011 – I relocated from TX to WA State due a job change. Submitted Short-sale paperwork to Chase which they refused to consider because I was not in arrears. Now they want backup docs to put me into a “Deed in lieu” program. My issue is not financial hardship. My issue is that I cannot live in a house in TX since I live and work in WA State – and I cannot sell it. What are my options w/FHA to get out from under this mortgage? I cannot buy another home as long as I have this boat-anchor around my neck. Please advise.

    • Joe Wallace says:

      The real issue here isn’t so much what the FHA offers as which programs the lender is willing to consider–have you asked the lender what options they would consider outside a Deed-In-Lieu? Guessing you have already, but I would advise calling the FHA directly at 1-800-CALL FHA to get some advice on how to proceed and see if there is an option more advantageous to you than something connected with foreclosure, short sales, etc.

  3. Octavian says:

    My lender stated that it’s nearly impossible for a FHA loan to qualify for a Deed In Lieu. Is that accurate or are they not being honest about this?

    • Joe Wallace says:

      It might be best to speak with an FHA counselor on this issue–contact the FHA at 1-800 CALL FHA to discuss your specific circumstances and what your options may be.

  4. HOABoard of Directors says:

    If FHA proceeds with a Deed-in-Lieu on a condominium with owner delinquent HOA assessments, is FHA responsible for paying the delinquent assessments?
    In California, a Deed-In-Lieu is assuming all debts including delinquent HOA assessments (dues) to the property and therefore responsible for payment – is FHA any different?
    If so, please provide statue on this ruling.

  5. P Johnson says:

    My son has tried to sell, rent, short-sale his home after moving from MI to Washington DC. US Bank has been less than helpful and seems to undermine any attempt to unload this debt. He listed his house before moving to DC, no takers. He rented it for 2 years and now it sits empty. He asked for a short-sale approval and US Bank said to go ahead and list while they process paperwork. Two offers made and US Bank refused the sale because it was rented over 18 months. (actually 18 months and 6 days when we started the process). Now we inquired the new Deed-In-Lieu program to start in March 2013. US Bank said he doesn’t qualify because his FHA loan is backed by Michigan State Housing Development. Help, any suggestions?

  6. Karen Peryea says:

    Some banks are looking at a Deed in Lieu of a Foreclosure a “Foreclosure”.
    Is there something I can tell them or something to show that this is not a Foreclosure?

    • Joe Wallace says:

      It’s up to the discretion of the individual financial institution as to how they would apply that credit information when trying to approve your loan–the FHA can’t force a lender to issue credit, so the lender’s policies (so long as they are within the law) would apply in such cases.

  7. Jlanier says:

    We have had to relocate much like the other person above, and have had our home on the market for 6 months, but not in a short sale. We now have 2 mortgages and can barely keep our heads above water making all the payments. We have talked to the bank about doing a Deed in Lieu but they are telling us that FHA requires the home be in a short sale for 120 days before it can be considered for a DIL. Is this correct, or are they just telling us this because it would conveniently put it past the time that we would have no taxes to pay in Pres. Obama’s plan? Also, why would it need to be in a Short Sale, when we had already invested 6 months in a reg. Sale trying to get rid of it?

    • Joe Wallace says:

      FHA loan rules state: “The Deed in Lieu of Foreclosure (DIL) is the second Disposition Option in which a Borrower voluntarily deeds their collateral property in exchange for a release from all obligations under the mortgage. A DIL of Foreclosure may not be accepted from Borrowers who can financially afford their mortgage payments.” As far as the 120 day requirement, contact the FHA directly for further guidance by calling 1-800 CALL FHA.

  8. Crystal Dixon says:

    Is it a fact that if I where to do a deed in lieu (DIL) that I would have to fill out a I9 as part of my taxes at the end of the year. Example we are on the market to sell for 50,000 and deed in lieu short sale is for 20,000 me as the mortgager would have to put 30,000 as income on my taxes. Which is putting me to owe back 2x as much at the end of the year, due to the house, not selling and going into deed of lieu.

    • Joe Wallace says:

      You would need to consult a tax expert for advice in this area–we aren’t qualified to comment on tax issues. But you can call the FHA directly at 1-800 CALL FHA for assistance with short sale and DIL issues.

  9. J Marinovicz says:

    My wife and I completed our deed in lieu of foreclosure in May 2012. We’ve been renting since and saving a lot for a down payment on a future home. I’ve heard mixed statements from various institutions and real estate agents – exactly how long after we complete the deed in lieu, can we approach a bank for a pre-approval on a new loan?

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