What is the difference between foreclosure and voluntary surrender?

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Question:

We are facing foreclosure due to a long, drawn out, ultimately unsuccessful loan modification attempt. At this point, what happens if we surrender the house? What's the difference between voluntarily surrendering the house and foreclosure?

Answer:

A foreclosure is a legal process that can take place either in or out of court and isĀ undertaken by a lender when a borrower defaults on a loan that is secured by real property. The lender goes through the foreclosure process in order to sell the property to satisfy the debt that is owed by the borrower. A voluntary surrender, commonly referred to as a deed in lieu of foreclosure, is an agreement between a borrower and a lender wherein the borrower voluntarily deeds title to the property securing a loan in default to the lender.

While it is a commonly held belief that a deed in lieu of foreclosure is less damaging to a borrower's credit report than a foreclosure, a deed in lieu of foreclosure will still have a negative effect on your credit history. Another thing to keep in mind when trying to complete a deed in lieu of foreclosure is that you should negotiate with your lender to include language in the deed in lieu of foreclosure agreement that the transaction is in full satisfaction of the mortgage obligation--in other words, after you deed the property to the lender, you will no longer owe any money to the lender. If your agreementĀ fails to include such language, depending on the laws of your state, you may be liable for a deficiency judgment afterwards.

For more on deeds in lieu of foreclosure and deficiency judgments, see our pages on Deed in Lieu of Foreclosure and Debts After Foreclosure. To find out whether your state permits deficiency lawsuits after deed in lieu of foreclosure, find your state on our page on State Foreclosure Laws.

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