What Is A Deed In Lieu of Foreclosure?

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For homeowners that have fallen behind or “defaulted” on their mortgage loan and have decided they do not want to keep the home, a deed in lieu of foreclosure may be an option for them.  In the simplest of terms, the deed in lieu allows the homeowners to voluntarily transfer the property from the homeowners name to the mortgage company’s name without going through the prolonged and for the mortgage company costly foreclosure process.  This process also satisfies the debt the homeowner owes to the mortgage company on the loan.  Although the loan is satisfied through this process, the homeowners’ credit will still reflect that the loan was in default but satisfied by a deed in lieu.  In other words, there will be a negative impact on the homeowners’ credit from executing the deed in lieu of foreclosure, but it may not be as detrimental as a foreclosure.

There are several things the mortgage company will consider before deciding whether they will agree to a deed in lieu of foreclosure on the property.  These include:

Are there any other mortgage loans (second, third, or Home Equity

Line of Credit (HELOC)) on the property?

Are there any homeowners’ association liens on the property?

Are there any judgment liens on the property?

Are there any other blemishes on the title?

If there are any of these issues, the mortgage company will most likely not agree to the deed in lieu of foreclosure and will proceed with the standard foreclosure process.  The mortgage company cannot eliminate the other liens on the property through the deed in lieu process.  As a result, if you have more than one mortgage loan or other liens on your property, you may want to consider other options including a short-sale of the property or filing bankruptcy.  Each of these options has their own risks and benefits and is discussed in other blogs.  Most deed in lieu of foreclosure paperwork is drafted by the mortgage company’s attorney, so it is recommended that the homeowners seek the advice of an attorney, usually someone practicing real estate law, before signing the deed in lieu documents.
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