What Is Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is a document that transfers the title of a property from the property owner to their lender in exchange for being relieved of the mortgage debt.

Understanding Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a potential option taken by a mortgagor, or homeowner, usually as a means to avoid foreclosure.

In this process, the mortgagor deeds the collateral property, which is typically the home, back to the lender serving as the mortgagee in exchange for the release of all obligations under the mortgage. Both sides must enter into the agreement voluntarily and in good faith. The document is signed by the homeowner, notarized by a notary public, and recorded in public records.

Key Takeaways

  • A deed in lieu of foreclosure is an option taken by a mortgagor—often a homeowner—usually as a means to avoid foreclosure.
  • It is a step that's usually taken only as a last resort, when the property owner has exhausted all other options, such as a loan modification or a short sale.
  • There are benefits for both parties, including the opportunity to avoid time-consuming and costly foreclosure proceedings.

This is a drastic step, usually taken only as a last resort when the property owner has exhausted all other options (such as a loan modification or a short sale) and has accepted the fact that they will lose their home.

Although the homeowner will have to relinquish their property and relocate, they will be relieved of the burden of the loan. This process is usually done with less public visibility than a foreclosure, so it may allow the property owner to minimize their embarrassment and keep their situation more private.

If you live in a state where you are responsible for any loan deficiency—the difference between the property's value and the amount you still owe on the mortgage—ask your lender to waive the deficiency and get it in writing.

Advantages of a Deed in Lieu of Foreclosure

A deed in lieu of foreclosure has advantages for both a borrower and a lender. For both parties, the most attractive benefit is usually the avoidance of long, time-consuming, and costly foreclosure proceedings.

In addition, the borrower can often avoid some public notoriety, depending on how this process is handled in their area. Since both sides reach a mutually agreeable understanding that includes specific terms as to when and how the property owner will vacate the property, the borrower also avoids the possibility of having officials show up at the door to evict them, which can happen with a foreclosure.

In some cases, the property owner may even be able to reach an agreement with the lender that allows them to lease the property back from the lender for a certain period of time. The lender often saves money by avoiding the expenses they would incur in a situation involving extended foreclosure proceedings.

In evaluating the potential benefits of agreeing to this arrangement, the lender needs to assess certain risks that may accompany this type of transaction. These potential risks include, among other things, the possibility that the property is not worth more than the remaining balance on the mortgage and that junior creditors might hold liens on the property.