How to Legally Do a Deed in Lieu of Foreclosure

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Losing your house to a short sale or foreclosure aren’t the only options available when facing financial hardship. If a loan modification isn’t possible through your lender, ask if they’ll consider a mortgage release, or deed-in-lieu. You return legal ownership of the property to the lender if it agrees to release you of all obligations attached to that mortgage. In some instances, the lender offers incentives to the homeowner in exchange for a deed-in-lieu as it'll avoid a costly foreclosure.

Contact your lender’s loss mitigation department and speak with an asset manager. Explain your circumstances and ask if they’ll work with you to achieve a mortgage release, or deed-in-lieu. Have them send the hardship package and their requests for information.

Pursue the deed-in-lieu to avoid the damage of a foreclosure or a short sale on your credit. Ask if the lender will provide relocation assistance in the form of cash when you leave the house. Maintain the house and pay all utilities and community fees, if applicable, to avoid having to pay them at closing.

File the hardship package you’ve filled out, explaining the cause of your financial setback and how you can no longer afford to make payments. Support your declarations with bank account statements, pay stubs and a hardship letter that details the reasons for your hardship. Explain that you will not be able to pay for the release of the mortgage.

Wait for 90 days for the asset manager to review your property’s value and the market conditions, your file, and to approve your deed-in-lieu request. Consider the options the asset manager presents: move immediately, remain in the home for up to three months without paying rent, or lease the home for an agreed upon fee for up to one year.

Sign the documents the lender presents and attend the closing of the transfer, knowing you’ve eliminated the debt of a mortgage and probably a deficiency judgment clearing you of the financial responsibility for the lender’s loss. Leave the home in broom-clean condition. Repair your credit, trim your debts and reapply for a new mortgage after two years of receiving your deed-in-lieu.