There was a forum discussion, where the poster wanted to do a deed in lieu of foreclosure on his house as he had to leave the property and move out of state. His house was destroyed by Hurricane Ike and he had to relocate to a different state for a new job. The poster could not afford to make payments on the mortgage anymore and wanted to sign over the property to the lender through deed in lieu. But the lender said a deed in lieu was not possible since the loan was insured by FHA. The lender further said that he could not approve the DIL even if the poster qualified for it, until foreclosure proceedings had started. The poster had the following questions:
1. Does having an FHA loan disqualify him for a deed in lieu?
2. Can he do anything to speed up the foreclosure proceedings so that the lender can offer a DIL?
The poster is no doubt stuck in a bad situation. On one hand, his house has been devastated by Hurricane Ike and may not sell in the market for a fair price. On the other hand, he cannot get rid of the property through a DIL as the lender would not approve of it.
A deed in lieu in this situation can be quite helpful for the poster. It will enable him to sign over the property to the lender. The lender can then sell off the property and recover the outstanding balance on the mortgage. Though it will affect his credit in a negative way, yet it will at least help him get rid of this property and move on with life.
FHA guidelines regarding DIL
There is no FHA rule or guideline that disqualifies a borrower for a deed in lieu of foreclosure. FHA lenders do accept deed in lieu requests if the borrower has exhausted all his loss mitigation options. FHA does not also have its own criteria to determine if a borrower qualifies for a deed in lieu. It is completely at the lender’s discretion if he would allow the borrower to deed over the house to him. The lender assesses the borrower’s extent of hardship, financial situation, etc. in order to check the borrower’s eligibility for the DIL. Thus, FHA does not have any rule that prohibits deed in lieu on FHA loans. In fact in 2006, when Hurricanes Katrina, Rita and Wilma wrecked havoc in many of the states, HUD extended special DIL authority to lenders to help borrowers affected by the hurricanes in major disaster areas. This may not apply to the poster’s situation. But it certainly goes on to prove that a DIL is possible on FHA loans.
DIL is the last option for the poster
In this situation, the poster hardly has any option, which can help him avoid foreclosure on the property. A loan modification can help in reducing the monthly mortgage payments. But since he is out of state, modifying the loan will be of little help to him. A short sale is not an option as no buyer would like to purchase a property in an area destroyed by hurricane. Thus, a DIL seems to be a last resort for the poster.
DIL and foreclosure proceedings
It is also not necessary for the lender to start the foreclosure proceedings before approving a deed in lieu. After all, DIL is an option to avoid foreclosure. If a borrower is behind on his payments and fears a possible foreclosure on his property, he can request a DIL. He does not have to wait for the lender to start foreclosure proceedings before negotiating the DIL of foreclosure.
How to convince the lender to accept a DIL
The poster needs to talk to the loss mitigation department of the mortgage company and do constant negotiations with them to convince them to allow a DIL. He should first list the property on the market to see if it sells. If it does not, in the next few months, there is a possibility that the lender would accept the DIL request, because often lenders want to see a property listed for at least a certain number of months before agreeing to do a DIL.
To know more on this topic, you can refer to the following discussion:
http://www.mortgagefit.com/problems/dil-fha.html .