When You're Losing Your Home

You were a happy homeowner but your life took a wrong turn and now you're in financial trouble. With no way to pay your mortgage  you try to find help. But you don't have enough income to refinance, and your lender declined to restructure your loan for the same reason. You can't sell your home for what you owe. What do you do now?

What Is a Deed In Lieu of Foreclosure?

A deed in lieu of foreclosure is an alternative to a foreclosure proceeding. It requires that you give up all your rights to the property, sign it over to your lender, and you are then released from your mortgage obligation.

Lenders are most likely to agree to a deed in lieu of foreclosure when it is obvious that you can't possibly make the mortgage payment and the property couldn't be sold for more than you owe. If it's worth more than the mortgage balance, the lender could foreclose, sell the property, and recover the balance on the loan plus the costs of foreclosure. When there is no way the lender will be able to recoup the costs of a foreclosure, it makes sense to accept a deed in lieu of foreclosure instead. This process takes place outside the court system and is therefore much faster and less expensive than foreclosing on the property. FHA loans have special rules, but in general if you meet HUD guidelines your FHA lender will accept your offer of a deed in lieu of foreclosure.

Avoiding Foreclosure: What's in it for You?

The biggest advantage to you is that on your credit report a deed in lieu of foreclosure isn't as bad as a foreclosure. Most lenders feel that foreclosure is the worst thing you can have on a credit report, and it will probably make your life even more difficult than it is already. First, the lender is likely to pass the high legal costs associated with foreclosing on to you. Second, you could be forced to surrender assets to your lender if you owe more than the property fetches in a foreclosure sale. Third, your other creditors may increase your interest rates because you will be perceived as a riskier borrower. So your credit card companies may increase your rate, even if you've paid them on time. Fourth, bad credit can keep you from getting a job or insurance, because statistically people with bad credit file more insurance claims and are less reliable employees.

Negotiating a Deed in Lieu of Foreclosure

Deeds in lieu of foreclosure are voluntary and take place outside the judicial system. That means there is room for negotiation. Ideally you would have a real estate attorney represent you in the transaction. If you don't negotiate, you could end up with the lender chasing after you for fees -- in addition to a foreclosure on your credit report. What you want ideally is a complete walk-away and a "paid-satisfactory" or at least "paid-settlement" on your credit report. The lender's reps may state that they can't do this but in fact they can.

When Your Lender Says No

Talk to them about a short sale. This involves you dropping your asking price and selling your home for less than the balance of the mortgage--with the lender accepting the proceeds as payment in full. Again, the idea is to keep a foreclosure off your credit report and make a clean break.

A deed in lieu of foreclosure is the act of giving a property back to the lender without foreclosure. Basically, you sign title(ownership) over to the bank, and no longer own the home. Some consider this a "better" option than going into foreclosure because you are willingly giving them title as opposed to them taking it by legal force (which occurs in foreclosure). That is not to say this will not have a negative impact on your credit, the difference is you can avoid late payment history which is almost certain to occur in foreclosure instances. Regardless a deed in lieu, is still going to negatively impact your ability to purchase a new home for at least 12 months.

Essentially, this is akin to handing over the keys to the lender.  This can be done to save costs from accruing from a normal foreclosure proceeding and could mean a lesser shortfall when the property is sold.  A property owner should explore all options with the advice of counsel before taking this step, however.  It does not automatically mean the homeowner will be free of any obligations if the home is sold for less than what is owed.  Other options vary from state to state such as the 'power of sale', for example, whereby the court orders an immediate sale of the property.  What protections this offers to the homeowner are best discovered via legal advice from a professional specializing in real estate law.  In short, 'deed in lieu of foreclosure' simply means 'Here is the deed [title] to the property so you do not need to foreclose'.