Foreclosing on properties is one option for dealing with loan defaults, but it holds some disadvantages for both the lender and the borrower. An alternative which can benefit both lender and borrower is a Deed in Lieu of Foreclosure.
Overview of Deeds in Lieu of Foreclosure
Texas offers many different types of deeds specific to each type of real estate transaction. A Deed in Lieu of Foreclosure provides a process for allowing a borrower to avoid foreclosure by transferring a title of property to a lender. Flag-Redfern Oil Co. v. Humble Expl. Co., Inc., 744 S.W.2d 6, 8 (Tex. 1987); Glenn v. Lucas, 376 S.W.3d 268, 276 n.14 (Tex. App.--Texarkana 2012, no. pet.).
While Texas law does not provide specific statutory guidelines for drafting a Deed in Lieu of Foreclosure, the format follows the format of a general warranty deed or a special warranty deed. The DILF will usually make direct reference to any underlying liens, indicating whether or not the borrower is relinquishing responsibility for those debts or liens. Often the Deed in Lieu of Foreclosure prohibits the merger of loan documents, including liens or security interests with the property title. Although the title says “in Lieu of,” the lender also may retain the right to sell and foreclose under the existing deed of trust.
Most deeds given in lieu of foreclosure include settlement and compromise agreements which clearly define the parties’ understanding and acceptance of the delivery of the Deed in Lieu of Foreclosure.
The Lender and the Deed in Lieu of Foreclosure
Foreclosure is a costly process for both the lender and the borrower. A lender who accepts a Deed in Lieu of Foreclosure can often resolve a situation more quickly and at a lower cost than foreclosing on a property. If the amount of debt for a property is less than the property value, accepting a Deed in Lieu of Foreclosure makes good sense for a lender. Another advantage for the lender is that a Deed in Lieu of Foreclosure does not actually prevent a lender from foreclosing on the property in the future. A lender may still foreclose after a DILF is in place by electing not to void the deed. Tex. Prop. Code § 51.06 (e). (A second method for foreclosing after a deed in lieu necessitates the lender void the Deed in Lieu of Foreclosure.) Tex. Prop. Code §51.006 (d).
The option to void a Deed in Lieu of Foreclosure further protects the lender. According to Tex. Prop. Code § 51.006 (b), if the property has undisclosed debts or liens, the lender can void the Deed in Lieu of Foreclosure. However, the lender does have the obligation to review the title since it should be properly recorded and made available to the lender. Id. § 13.002.
The Borrower and the Deed in Lieu of Foreclosure
A borrower also benefits from a Deed in Lieu of Foreclosure. By avoiding bankruptcy or foreclosure, the borrower can avoid the negative impact on credit ratings, especially helpful for future real estate and investment opportunities. Depending on the guaranty agreements, a borrower may benefit financially as well, particularly if the value of the property is high, and the borrower is willing to negotiate with the lender. For example, a borrower might negotiate to prevent the lender from suing the borrower. The agreements and settlements which accompany the Deed in Lieu of Foreclosure should specify the representation and warranties of the borrower.
It’s important to note, however, that while a borrower may strongly desire a Deed in Lieu of Foreclosure, the borrower cannot actually force a lender to accept one. Martin v. Uvalde Sav. & Loan Ass'n, 773 S.W.2d 808, 812 (Tex. App.--San Antonio, 1989, no pet.).
Transferring property by Deed in Lieu of Foreclosure can benefit all parties involved. However, the process is quite complex. A borrower or lender should consult a real estate attorney who knows how best to navigate the challenges of conveying property.
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