The process for completing a deed in lieu of foreclosure is going to vary somewhat depending on who your loan servicer (the company that handles the account on behalf of the owner of the loan) is and who the lender (or the current owner of your loan) is. In some cases, there are specific programs and guidelines in place designed to streamline the process of a deed in lieu of foreclosure. In any case, the key is that both the homeowner and the owner of the loan agree that a deed in lieu of foreclosure is the best option and that they work out an agreement together that the homeowner enters into on a voluntary basis.
(See Steps to Complete a Deed in Lieu of Foreclosure for a more detailed analysis.)
Understanding Deed in Lieu of Foreclosure
The deed in lieu of foreclosure process is, in general, a process whereby a homeowner gives up all legal rights to the home in exchange for being absolved of all obligations associated with it. In other words, a lender agrees to essentially take back the home. The mortgage goes away, and the lender gets the house back without having to foreclose. This is more advantageous to the homeowner because the homeowner does not have to go through the entire foreclosure process and less damage is done to the homeowner's credit score (though not much less).
There is also the opportunity to negotiate what will happen if there is a deficiency between what the home is worth and what is owed on it. If a lender forecloses and state law allows, the lender can normally come after (sue) the debtor for the deficiency balance that isn't recovered in the foreclosure. When a deed in lieu of foreclosure option is chosen, because it is voluntary and involves agreement between lender and homeowner, it is possible to negotiate a deal in which the lender agrees not to pursue a deficiency judgment or the borrower agrees to repay the deficit over time.
Finally, in some cases, there is another significant benefit for borrowers: they get to receive relocation money. This is an option with Fannie Mae loans, with VA loans, and even in some cases with conventional mortgages when the right criteria is met. The opportunity to receive relocation money is an incentive to borrowers to actively pursue alternatives to foreclosure.
While the above are the basic general features of a deed in lieu of foreclosure, it is also important to understand that there is a process that must be followed, which can vary. Usually, the homeowner falls behind on mortgage payments. The homeowner and lender negotiate a deal wherein the homeowner will vacate the home in good condition and sign over all rights to the home to the lender. The homeowner will probably provide proof of income and financial information and evidence that the home has not or cannot sell for what is owed when selling at fair market value. The process is completed when the homeowner signs the deed in lieu paperwork. In some cases, a letter or affidavit needs to be submitted that indicates that this process was voluntary on the part of the homeowner.
In some cases, the lender will allow the homeowner to continue to live in the home even after turning over the deed, as long as this is agreed to. Fannie Mae, for example, offers this option and refers to it as "deed for lease."
If you are trying to avoid foreclosure, you should strongly consider getting help doing so from a lawyer. There are a myriad of different foreclosure avoidance tactics, and some may be better than others, especially for specific situations. To find out if deed in lieu of foreclosure is right for you or to explore other possible options, you should call a lawyer as soon as possible, since some options may require you act sooner rather than later.