Do I Need a Lawyer for a Deed in Lieu of Foreclosure?

Find out when you should hire an attorney to help with a deed in lieu foreclosure, and when you can do it yourself.

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Question

I took out a mortgage loan a couple of years ago, but got in over my head. Now I’m behind in my monthly payments and I want to give the home to the bank so I can avoid a foreclosure. Do I need to hire a lawyer to help me to complete a deed in lieu of foreclosure?

Answer

Maybe. Whether or not you should hire, or at least consult with, an attorney depends on the level of comfort and understanding that you have about the deed in lieu of foreclosure process, as well as the documents you’ll have to sign to complete the transaction.

Understanding Deeds in Lieu of Foreclosure

A deed in lieu of foreclosure (deed in lieu) is one way that borrowers who are behind in their mortgage payments can avoid a foreclosure. Specifically, with a deed in lieu, the borrowers agree to sign title to the home over to the back. In exchange, the bank agrees that the borrowers won't be liable for all, or some, of the money due under the defaulted promissory note and to release the mortgage lien. (Learn about the difference between a mortgage and a promissory note.)

The Deed in Lieu Process

To obtain a deed in lieu, you must first submit an application along with supporting documentation to your mortgage servicer (the company you make your mortgage payments to). If you meet all qualifications, the bank will approve your request, but typically only if there are no junior liens on the property, such as a second mortgage or judgment liens. (One exception to this general rule is if the bank happens to hold both the first and second mortgage, then it may still approve the deed in lieu.) (Learn more about the different types of property liens.)

Deed in Lieu Documents You’ll Have to Sign

Once the bank approves a deed in lieu, it will send you several documents to sign to complete the transaction:

  • a grant deed in lieu of foreclosure (which transfers title to the property to the bank), and
  • an estoppel affidavit.

Among other things, the estoppel affidavit generally includes the terms of the agreement, such as whether or not the bank has the right to seek a deficiency judgment (which is explained in further detail below), as well as a provision that you are acting voluntarily, not under duress or undue influence. In some cases, there could be a separate deed in lieu agreement that contains the terms of the deal. (Learn more general information about deeds in lieu in Nolo’s Short Sales and Deeds in Lieu of Foreclosure topic area.)

When Hiring an Attorney Might Be a Good Idea

Below are some situations where you should consider hiring, or at least consulting with, an attorney to assist you with the deed in lieu.

You don’t know how to fill out the deed in lieu application. Hiring an attorney may be a good idea if you want a deed in lieu, but you don’t understand the application process. For example, it may be worthwhile to hire an attorney if you’ve already spoken to your servicer about a deed in lieu, but are confused about:

  • how to fill out the application, or
  • what documentation you need to submit along with the application.

An attorney can help you fill out paperwork.

Keep in mind you can also get free help with your application package from a HUD-approved housing counselor rather than hiring an attorney to help you. Go to the U.S. Department of Housing and Urban Development’s webpage to find the contact information for a housing counseling agency near you.

The bank won’t release its right to pursue you for a deficiency judgment. With a deed in lieu, the “deficiency” is the difference between the fair market value of the property and the mortgage debt. (For example, say your house is worth $150,000, but you owe the bank $175,0000. The deficiency is $25,000.) States typically don't have laws preventing lenders from getting deficiency judgments after a deed in lieu. (Learn more about deficiency judgments following a deed in lieu of foreclosure.)

In the past, banks would routinely agree not to seek a deficiency judgment after a deed in lieu in consideration for the borrowers agreeing to transfer the property. However, it is now more common for banks to try to recover some or all of the deficiency from the borrowers.

To avoid a deficiency judgment after the deed in lieu is completed, the paperwork that the bank sends you to sign must expressly state that:

  • the transaction is in full satisfaction of the debt, and/or
  • the bank agrees not to seek a personal judgment against you.

If you can’t find this language in the deed in lieu documents (or if the bank specifically reserves the right to go after you for a deficiency judgment), an attorney who may be able to help you negotiate a release of your personal liability for the remaining debt or a reduced deficiency.

You don’t understand the deed in lieu documents. If you receive the deed in lieu documents from the bank, but can’t figure out what your rights are under the agreement or don’t fully understand what the documents that you’re signing actually mean, you should consider hiring an attorney to go over the paperwork and explain all of the terms and conditions to you.

When You Might Not Need an Attorney

On the other hand, if you have a good understanding of the deed in lieu process, application, and the documents you’re required to sign, there’s no requirement that you must have an attorney to help you with the transaction. For example, you might not need an attorney if all of the following are true.

  • You have spoken to the servicer about completing a deed in lieu and a representative fully explained the process to you in way that you can understand.
  • You understand how to fill out the deed in lieu application and what supporting documents you need to submit along with your request.
  • You have done your homework to educate yourself about deeds in lieu and your rights under the transaction.
  • Once you receive the deed in lieu documents, they clearly state that you are not liable for any deficiency.
  • You have a thorough understanding about the contents of each document that you must sign to complete the deed in lieu transaction.

The Bottom Line

Ultimately, if you don’t fully understand the process or what you’re signing, you should consider consulting with a qualified attorney who can help you with the deed in lieu. The attorney can also help you negotiate a release of your personal liability or a reduced deficiency if necessary. (Learn more about how to find and hire an attorney in Nolo’s Foreclosure Lawyers & Other Foreclosure Help area.)

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