What Is Deed in Lieu of Foreclosure?

To deed in lieu of foreclosure is when a property owner surrenders the deed to the property 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, 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 that is 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.

This is a drastic step, usually taken only as a last resort when the property owner has exhausted all other options and has accepted the fact that they will inevitably lose their home. Although the homeowner will have to relinquish their property and relocate, they will be relieved of the burden of owing the remainder of the loan. This process is also 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.

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 ability to avoid a long, drawn-out period of 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 their door to evict them, as 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 quite a bit of 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.