How does a Deed in Lieu Foreclosure work?

A homeowner can avoid foreclosure by giving their mortgagor a "deed in lieu of foreclosure." The lender agrees to terminate the debt in exchange for clear title to and ownership of the real property. The transaction can be beneficial to both sides – the borrower avoids having a foreclosure in his or her credit history and is relieved of responsibility for the defaulted home loan; the lender does not have to pursue the timely and expensive foreclosure process, and can immediately place the property back on the market.
It is essential that you retain an experienced real estate/foreclosure attorney to handle the negotiations and deed transfer. In particular, you will need an attorney to analyze the local, state and federal tax ramifications of the deed conveyance. Further, it is a complicated transfer process.  Both parties must agree to both an agreement in lieu of foreclosure, which outlines the terms of the deed, as well as execute the deed itself, which transfers legal ownership of the property.  Once the agreements are reached, the lender then classifies the original loan as paid and issues a waiver to deficiency judgment, which would normally go into effect to protect the lender against the re-sale of the property resulting in an amount less than the debt. A third party escrow service then executes the agreement, which releases both parties from the original morgage contract.