It might be hard to imagine any benefit in being unable to make your mortgage payments, but some options can be better than others when you have no clear way out of a bad situation. If your lender accepts a deed in lieu of foreclosure, you can sign your property over in exchange for relief from responsibility for your mortgage. Most lenders require that you at least attempt a short sale first, or maybe even a loan modification, but if these options fail, the cloud of a deed in lieu has a few silver linings.
Ease of Process
If your bank requires you to attempt a short sale before it accepts a deed in lieu, it's usually just for a limited period of time. After you clear this hurdle, your hard work is over. You've presumably already gone through the work of applying for the deed in lieu, so at this point you can simply sign on the dotted line and walk away from your mortgage and the property. The deed in lieu process is typically quicker and less public than the short sale or foreclosure process.
After your lender accepts a deed in lieu, it sells your home to recapture the money it gave you toward its purchase. The sale may or may not cover your outstanding mortgage balance. Sometimes – but not always – your lender will forgive the difference. Don't take it for granted that this will occur, however. Have an experienced attorney read over your deed in lieu contract to make sure it forgives any potential deficiency.
Money to Start Over
Depending on how much equity you have in your home, if any, you may be able to negotiate "cash for keys" with your lender. This typically involves leaving your home in tiptop condition so it can be listed with a real estate agent immediately. In exchange, your lender may give you a few thousand dollars to help you start over elsewhere.
Deeds in lieu have a reputation for being a little easier on your credit than short sales or foreclosures, but this isn't true. Each of these processes affects your credit score similarly. No matter how you look at it, you took out a loan to purchase your home and you couldn't pay it off, so your score is going to take a hit. On the bright side, future lenders might be willing to consider why your score is low. You may have an edge if you negotiated a deed in lieu instead of forcing your lender into an expensive and drawn-out foreclosure process.
- Nolo: Short Sales and Deeds in Lieu of Foreclosure
- Attorneys Title Guaranty Fund: Deeds in Lieu of Foreclosure – Advantages, Disadvantages and Drafting
- SunSentinal.com: Ask a Real Estate Pro – Benefits, Drawbacks of a Deed in Lieu of Foreclosure
- The Washington Post: What's Worse for Credit Score – Foreclosure, Short Sale or Deed in Lieu?
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.