If you're behind on your mortgage payments, one way to avoid a foreclosure is by completing a deed in lieu of foreclosure (deed in lieu). With a deed in lieu, you agree to give up the home, and the lender agrees not to foreclose. As part of the transaction, you might even receive relocation assistance, which is typically a thousand dollars or more when available.
Read on to get basic information on deeds in lieu, including how the process works and what happens to any deficiency afterward.
In a deed in lieu transaction, a homeowner who’s facing a foreclosure gives up all legal rights to the home in exchange for being absolved of all obligations associated with the loan. In other words, the lender agrees to take ownership of the home in exchange for agreeing not to foreclose. The mortgage loan goes away, and the lender gets title to the house without having to foreclose. (To learn more about how deeds in lieu work, see Basics of a Deed in Lieu of Foreclosure.)
The process for completing a deed in lieu will vary somewhat depending on who your loan servicer is and who the lender (or current owner of your loan, called an “investor”) is. Generally, you'll have to try to sell the property for at least 90 days at fair market value before the lender will consent to accepting a deed in lieu. Also, you usually must have clear title, which means there can't be other liens on the property. You might have to provide details about your finances and show that the home won't sell for what's owed.
As part of the deal, the homeowner usually agrees to vacate the home, leaving it in good (“broom swept”) condition, and sign over ownership to the lender. In some cases, the borrower will have to submit an affidavit indicating that the process was voluntary. (To learn how to start the deed in lieu process, what to expect along the way, and whether you'll face a deficiency judgment, see Steps to Complete a Deed in Lieu of Foreclosure.)
In some cases, the lender will allow the homeowner to rent the home even after turning over the deed. Fannie Mae, for example, offers this option to borrowers who have Fannie Mae loans. Also, in some cases, the departing homeowner will receive relocation money after completing a deed in lieu.
With a deed in lieu, the homeowner may negotiate what will happen to the deficiency, if one exists.
Because a deed in lieu is a voluntary agreement between you and the lender, it’s possible to negotiate a deal in which:
Be aware that, if the lender forgives all or part of the deficiency, you might face tax consequences.
If you're considering completing a deed in lieu, consider talking to a lawyer. Many different foreclosure avoidance options exist, including loan modifications and short sales, and some options might be better than others, especially for specific situations. To find out if a deed in lieu might be right for you or to explore other possible options, contact a lawyer.