Deed In Lieu of Foreclosure: The Good and The Bad

A deed in lieu of foreclosure is an option that you can use if you are facing foreclosure.  It’s a good alternative when you have exhausted other possibilities such as refinancing or a mortgage modification.  You sign over the deed to your home to your lender, and in exchange your lender agrees to release you from any further liability.  You should negotiate in writing with your lender that the deed in lieu satisfies your mortgage debt so you can walk away owing your lender nothing.  A deed in lieu is a good idea when you have exhausted other possibilities such as refinancing or a mortgage modification.   

Why a Deed in Lieu is a Good Idea

The advantages of a deed in lieu include:

• You don’t have to worry about having to go through a formal foreclosure proceeding.
• Your lender saves time and money by not having to foreclose on your home and having to sell your home either at a foreclosure action or listing it with a local Realtor as an REO (real estate owned property). 
• You avoid a foreclosure deficiency judgment.

Why a Deed in Lieu is a Bad Idea

The disadvantages of a deed in lieu include:

• You lose your home.
• Not all lenders will agree to a deed in lieu. 
• Your credit could be negatively impacted depending on how your lender reports the transaction.  Try and negotiate that your lender reports the transaction as paid in full or satisfied so your credit score won’t go down as much.

Difference Between a Deed in Lieu and Short Sale

When you participate in a deed in lieu, you are not selling your home.  You are just giving it back.  There are no broker commissions.  When you decide to sell your home with a short sale, you have to list it with a Realtor, and you have to wait for a buyer to sign a contract with you, subject to your lender’s approval.  The brokerage commission is deducted from the sale proceeds that the bank receives.  The lender could come after you for a deficiency judgment in a short sale so you should negotiate in writing that the sale proceeds satisfy your mortgage debt.   Short sales can take 3-6 months or longer.  A deed in lieu is quicker and preferred.     

Hire an Attorney

You should hire a foreclosure defense attorney to assist you with negotiations of a deed in lieu with your lender.  The attorney can also discuss with you other options to save your home from foreclosure.