Basics of a Deed in Lieu of Foreclosure

Find out how a deed in lieu works, and how it can help prevent a foreclosure.

Are you behind on your house payments and considering just letting your house go in foreclosure? Have you been getting collection calls and feel like it’s time to give up? When you feel like you have no options, it’s tempting to do nothing and just accept the inevitable. However, before you give up, you need to know that you do have options, what those options are, and how those options can work for you. One of those options is for you to complete a deed in lieu of foreclosure.

What Exactly is Foreclosure?

In a foreclosure, your lender is essentially calling your loan due and telling you that they can take your house because you have defaulted. Remember that huge stack of papers you signed when you purchased your home? In that pile was a mortgage (or deed of trust) that you signed giving the bank a security interest in your home. This means that in the event of a default (i.e., you stop paying your mortgage), the bank has the right to take your house. Foreclosure is the legal term for the process your lender goes through to take and sell your house to recover the money it loaned you.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is an alternative to foreclosure that has been around for years. It is a negotiated settlement between you and your lender. You voluntarily relinquish title to your house, and your lender agrees to stop the foreclosure. A deed in lieu of foreclosure can benefit both you and your lender. It saves your lender from foreclosure costs, and you won't have a foreclosure on your financial history. (However, a deed in lieu of foreclosure will still significantly hurt your credit score.)

Avoiding a Deficiency Judgment

In some states, lenders have the right to sue borrowers for deficiencies after a foreclosure or a deed in lieu of foreclosure.

A deficiency is the difference between the amount you owe on your mortgage and the price your lender gets for your home when they sell it at a foreclosure sale. In other words, if you owe your mortgage lender $200,000 on your house and you default, and they can only sell the house for $100,000, then the bank can still come after you for the remaining $100,000--even though they took the house as well! Learn more about Deficiency Judgments After a Foreclosure.

With a deed in lieu of foreclosure, the deficiency is the difference between the total debt and the fair market value of the house.

As part of the deed in lieu of foreclosure negotiations, you should get your lender to agree to release you from having to repay any deficiency, perhaps in exchange for your agreeing to deliver the house to your lender in good condition. Make sure to get the deficiency waiver in writing.

Know Your Foreclosure Options

When you are a distressed homeowner, knowing what your options are is very important. As soon as you know that you are in financial distress, call your bank's loss mitigation department to find out what alternatives to foreclosure, such as a refinance, loan modification, short sale, or deed in lieu of foreclosure are available to you.

You have nothing to lose by calling, and the call may make a huge difference. If the bank agrees to work with you, you will typically be provided a packet of information and documents to complete. If you don't understand the contents of any of these documents, ask for help, either from an attorney or a free HUD-certified housing counselor (to find a HUD-certified housing counselor, call 888-995-HOPE or visit www.995hope.org).

While the foreclosure process can be scary, you have some choice in the matter. Ask for help. Explore your options. Most of all, stay informed.

See Steps to Completing a Deed in Lieu for more information on how the deed in lieu of foreclosure process works.

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