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Deed in Lieu

The deed in lieu of foreclosure offers several advantages to both the borrower and the lender in certain circumstances. The biggest advantage to the borrower is that it immediately releases him from most or all of the personal indebtedness associated with the defaulted loan.

Deed in Lieu is similar to a voluntary repossession. You are signing over the deed or “title” to your property and the lender agrees to cancel the mortgage. In other words, the typical deed in lieu of foreclosure is a consensual transaction.

As a way to avoid foreclosure, this procedure allows you to transfer title to your property to your lender or mortgage company voluntarily and your debt or deficiency is usually completely forgiven. This will not save your home, but it will protect your future. Although a deed in lieu of foreclosure is a negative item on your credit report, it is less harmful than foreclosure.

The process works this way:

Under certain circumstances, a lender will accept the property back from the borrower as full payment of the loan. This benefits the lender because it saves them the time and expense (including attorney fees, trustee fees, and eviction costs) of actually going through the foreclosure process and removing the borrower from the property.

This process is not simple. It requires a complex, detailed analysis of current and future (projected) value of the property. Once the lender is comfortable with the actual “fair market value” of the property, they must be convinced the borrower can not afford to make the payment.

Specifics Requirements

Generally speaking, there are certain guidelines that must be followed before the lender will consider the Deed in Lieu. It should be noted prior to engaging in a consensual deed in lieu that they are not “easy” and, fail more times than they succeed.

They are:

  • The borrower must have suffered a hardship such as loss of job, sickness, dissolution of marriage, etc.
  • The property is generally an individual’s former homestead; the Deed in Lieu of Foreclosure is generally not for abandoned properties or investment properties;
  • The borrower must have exhausted other options / financial resources;
  • The property must have been on the market between 90 and 180 days;
  • There cannot be any other liens on the property;
  • The property must be left in clean condition and sometimes the lender requires an inventory & a statement of condition.

Possible Consequences

The Lender reserves the right to seek a deficiency judgment against you, the borrower / homeowner. Once the lender takes possession, the property ( REO) will be put up for sale. Unless otherwise stipulated in the Deed in Lieu of Foreclosure agreement, the lender may come after you for the unpaid debt.