How does a deed in lieu of foreclosure work?

A deed in lieu of foreclosure works the same in one state as it does in most other states. Instead of wondering how a deed in lieu of foreclosure works in your state, the better question is, "How does a deed in lieu of foreclosure work in general?" Here's how.

A deed in lieu of foreclosure is a negotiated settlement between you (the homeowner) and your mortgage lender. You hand over to your lender the deed, or ownership, of your home in exchange for the lender agreeing not to foreclose. In states where deficiency judgments are allowed, you should also have your lender agree in writing not to pursue a deficiency judgment afterwards. To find out whether deficiency judgments are allowed in your state, read our article Anti-Deficiency Laws. Keep in mind that you may face tax consequences if your lender agrees to cancel any mortgage debt, including the deficiency. Learn more in our article Income Tax Liability for Deficiencies.

Each lender will have different guidelines as to whether they will approve a deed in lieu of foreclosure or not. Contact your lender directly to find out what their guidelines are. Many lenders will want to see a serious effort on your part to sell your house for a certain period of time (three months is typical) before they will consider your deed in lieu of foreclosure application. Most won't accept a deed in lieu of foreclosure if there are additional liens on your property, such as a second mortgage or home equity line of credit. Lenders aren't in the business of owning real property, so you will need to offer convincing evidence that it makes more financial sense to your lender to accept the deed in lieu of foreclosure rather than foreclose.

If your lender agrees to accept a deed in lieu of foreclosure, carefully read the entire deed in lieu of foreclosure agreement and make sure there are no onerous terms. If you need help reading the agreement--or you need help deciding whether a deed in lieu of foreclosure is best for you or negotiating with your bank--contact a HUD-approved housing counselor at www.995hope.org or 888-995-HOPE (4673).