Another option to stop foreclosure is a Deed in Lieu of Foreclosure (DIL). This essentially means giving your house back to the bank and being able to walk away. The first mortgage holder will not pursue a deficiency judgment if a DIL is approved. A deficiency judgment is an unsecured money judgment against a borrower whose property sale did not produce sufficient funds to pay back the loan in full. However, this process does have consequences.
A Deed in Lieu of Foreclosure is reported to credit reporting agencies in the same way a foreclosure would. It will not be as damaging to your credit, but will still have a negative impact. If you have more than one mortgage on your property and the first lender agrees to a DIL, this will do nothing to settle the second mortgage. Many lien holders will not offer a DIL on the first mortgage until you negotiate a settlement with the second mortgage holder. The second lender may accept a settlement from you by having you either pay them an agreed lump sum of money or by having you sign a separate promissory note in return for their releasing the lien, a form of security interest granted to secure the payment of a debt, on the property.
Many banks profess to offer Deed in Lieu of Foreclosure as an option to stopping foreclosure, but only a small percentage is actually granted to homeowners. A short sale is generally the best way to stop foreclosure if you owe more than the house is worth. The rule of thumb is that only when a short sale is unsuccessful should you pursue a Deed in Lieu of Foreclosure.
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