What Happens to a Tenant if the Owner Does a Deed in Lieu?

by Phil Altshuler ; Updated July 27, 2017

A deed in lieu of foreclosure is a document the owner of a property gives to his lender releasing his interest in the property. The result is the same as a foreclosure, except the legal action does not take four months. The property transfers to the lender as soon as the deed records. If you are a tenant in the property, you have new rights under the Protecting Tenants at Foreclosure Act enacted in 2009.

Tenant Rights

If you have a lease, the term of the lease is valid under the Protecting Tenants at Foreclosure Act. This means that if your lease is valid for three more years, you have three years before you are required to vacate the property. The only exception to this rule is if the new owner intends to occupy the property as his primary residence, he can require you to vacate the property in 90 days. In the case of a deed in lieu, the lender would own the property. If the lender were a corporate entity, the primary residence rule would not apply, since a corporate entity could not occupy a property. If it were an individual, it would apply. If you do not have a lease, you will have 90 days to vacate.

Deed in Lieu

Lenders are not required to accept a deed in lieu. In fact, many lenders will not accept one. This is because there are some cases where lenders make more money with a full foreclosure due to some compensating government reimbursements. The deed in lieu is a deed that takes the place of a foreclosure. It will still have a major effect on an individual's credit report, but it will not be as bad as a full foreclosure. If you find out about a pending foreclosure or that the owner is planning to give the lender a deed in lieu, contact the lender immediately. If you have a lease, give a copy to the lender.

Credit

If you are the tenant and you are required to move in 90 days, check your credit after you move. You can obtain a free copy at AnnualCreditReport.com. Check to see if the deed in lieu or a foreclosure appears on your credit report. If it does, obtain copies of all three of your credit reports and send each agency a copy of your lease or agreement along with a copy of the eviction notice with a request to remove the information from your credit report. Keep several copies of your rental agreement and the eviction notice. You may need them again.

Considerations

The Protecting Tenants Act was enacted because of the large number of foreclosures that started during the mortgage crisis that began in 2008. A large number of foreclosures were on rental properties and tenants received a three-day notice to vacate the property. This is very difficult to do. It takes longer than that to find another place to live. Often, the new property would not be available for several weeks. This was a tremendous burden on renters, who were being evicted due to no fault of their own.

About the Author

Phil Altshuler has written award-winning ad copy and sales-training literature since 1965. He is an expert in conventional and sub-prime loans, bankruptcy, mortgage loan modifications and credit. Altshuler was a licensed mortgage broker in California and Arizona, as well as a licensed electrical contractor. He has a Bachelor of Science in electronic engineering from California Polytechnic State University.