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- A deed in lieu of foreclosure might help you avoid foreclosure if you can no longer afford your mortgage.
- You voluntarily give your mortgage servicer the deed to your home and are relieved of your debt.
- Taking this approach can be less damaging to your credit than a foreclosure.
If you're behind on your mortgage payments and don't see a way to catch up, a deed in lieu of foreclosure might be a good option.
A deed in lieu of foreclosure is a legal process where you voluntarily transfer the title of the home to your mortgage servicer. In exchange, your servicer cancels your debt. The arrangement lets you avoid foreclosure while minimizing the damage to your credit score.
Here's what you need to know if you're considering a deed in lieu of foreclosure.
How a deed in lieu works
A deed in lieu of foreclosure may also be called a deed in lieu, mortgage release, surrender of possession agreement, voluntary liquidation, or voluntary conveyance. Here's how it works:
Voluntarily transferring ownership to the lender
A deed in lieu is a mutual agreement between you and your loan servicer in which you voluntarily surrender ownership of your property and the servicer releases you from your mortgage obligations.
It's a proactive step you take instead of going through the foreclosure process. Your servicer might even offer benefits like relocation assistance if you keep the property in good condition.
The deed in lieu of foreclosure process
Obtaining a deed in lieu of foreclosure isn't as simple as just requesting one. Instead, you and your loan servicer must agree to it.
While the exact process varies by lender, here are the basic steps:
- Contact your mortgage servicer — the company you send your mortgage payments to each month — to explain your situation and get the process started.
- Gather your financial documents, such as mortgage statements, bank statements, and pay stubs.
- Fill out the deed in lieu of foreclosure form and submit the requested documentation.
- Sign and notarize the title-transferring documents.
Benefits of a deed in lieu
There are several benefits to choosing a deed in lieu over a foreclosure.
As Jon Sanborn, cofounder of SD House Guys, explains, "A deed in lieu of foreclosure can help homeowners avoid some of the worst effects of foreclosure."
With a deed in lieu, you'll be able to:
Avoid a lengthy foreclosure process
First and foremost, it lets you skip the lengthy and stressful foreclosure process. What's more, it can help you avoid a foreclosure on your credit report, which can severely damage your credit score and make it difficult to get future loans, Sanborn says.
Potentially incur less damage to your credit
A deed in lieu can also help you avoid having a foreclosure on your credit report, which can severely damage your credit score and make it difficult to get future loans, Sanborn says.
A foreclosure stays on your credit report for seven years. According to FICO, it can also drop your credit score by as much as 160 points.
Possibly procure a deficiency waiver
Your lender may offer you a deficiency waiver if you choose a deed in lieu over a foreclosure. This essentially means that if the home sells for less than what you owe on it after the lender takes ownership, you won't owe them the difference (and they won't sue you for it either).
Drawbacks of a deed in lieu
While they can help you avoid foreclosure, deeds in lieu have disadvantages, too. Some of these include:
You can lose your home
A deed in lieu may not be a foreclosure, but the outcome is still the same: Your house will no longer be yours. You should only consider this if it's your last resort and there is no chance of you getting current on your overdue mortgage payments.
You'll also lose the money you put into the home, including your down payment, mortgage payments, and the value of any improvements.
The lender might not agree
Just choosing a deed in lieu isn't enough. Ultimately, your servicer has the final say — and it may not agree to your request.
For example, your servicer might reject your request for a deed in lieu if:
- You haven't tried other options first
- Your home is in poor condition
- There are liens or tax judgments on your property
- Your financial hardship is temporary
Keep in mind that even if the lender approves, you could still be on the hook for the difference between what you owe on your mortgage and your home's worth. The Consumer Financial Protection Bureau recommends asking your servicer to waive that requirement in states where it applies.
Potential tax implications
If your lender does grant you a deficiency waiver or otherwise cancels the debt you owe them (even partially), there may be tax implications. You might owe taxes on the canceled or forgiven debt because the IRS classifies it as taxable income.
Pros and cons of deed in lieu of foreclosure
A deed in lieu of foreclosure can be a more favorable option than an imminent foreclosure. Still, it's important to consider the potential benefits and drawbacks before deciding whether a deed in lieu is right for you.
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Deed in lieu of foreclosure vs short sale
With a deed in lieu of foreclosure, you give your lender ownership of the home in exchange for releasing you from the mortgage. With a short sale, your lender allows you to sell the home for less than what you owe.
Who should consider a deed in lieu of foreclosure
A deed in lieu of foreclosure might make sense if you:
- Don't have much equity in the home
- Are behind on your mortgage payments and don't expect to catch up anytime soon
- Are facing a long-term financial hardship, not just a temporary setback
- Are underwater on your mortgage
- Are unable or unwilling to sell your home
Still, the decision to seek a deed in lieu should not be taken lightly. It's helpful to consider the severity of your financial distress, your ability to find another place to live, and the effect on your credit score, Sanborn says. You should also consider whether you're willing to give up ownership of your home in exchange for the loan being canceled, he adds.
While a deed in lieu can help you avoid foreclosure, there are other options for temporary or permanent financial relief, including:
"The best option for each homeowner will depend on their individual circumstances," Sanborn says.
If you're having trouble affording your mortgage, reach out to your loan servicer and consider contacting a HUD-certified housing counselor for help exploring your options. It can also be helpful to speak with a licensed financial planner or advisor before making any decisions.
Frequently asked questions about deed in lieu of foreclosure (FAQ)
How to qualify for a deed in lieu of foreclosure depends on your lender, but you'll typically need to be in default (at least a few months behind on your payments) and be able to demonstrate financial hardship. Talk to your loan servicer for more information.
Alternatives to a deed in lieu include loan modification, which lets you change the term and rate of your loan. A short sale, refinance, or bankruptcy is also an option.
Yes, a deed in lieu will stop the foreclosure if the lender accepts it. However, you will still lose ownership of the house.
You don't necessarily need an attorney for a deed in lieu, but it's highly recommended you consult one, as deeds in lieu can be complicated. They can help you understand the terms of the agreement, including deficiency waivers or other legal aspects.
Sometimes, a lender may offer money in the form of a small relocation incentive in exchange for a deed in lieu. The primary goal of these, though, is to provide debt relief to the borrower.
With a deed in lieu of foreclosure, you agree to give your lender the property. In exchange, they won't foreclose on the house (sparing you from negative impact on your credit).
Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards.
Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.
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