When the worst happens and you fall behind with your mortgage payments, you have options to get out of the situation as painlessly as possible. Foreclosure can be ugly and stressful for everyone involved, but a deed in lieu of foreclosure can avoid much of the trauma. You’ll still lose your home, but you might be able to live there a little while longer while you get back on your feet, at least until the deed in lieu of foreclosure process is finalized.
What Is a Deed in Lieu?
A deed in lieu of foreclosure is just what it sounds like – you effectively transfer title to your home to your lender rather than have the lender foreclose. You’re giving the property to the bank in exchange for relieving you of any further responsibility for the mortgage. Lenders often prefer this solution because foreclosure costs them more and takes longer.
The exact process, provisions and the rights of both parties can vary a little depending on state law, but one rule is universal: Both you and your lender must enter into the agreement voluntarily.
The Basic Steps – Make the Pitch
The deed in lieu of foreclosure process begins with making an official overture to your lender’s loss mitigation department to settle your delinquent mortgage in this way. The offer must typically come from you because of that “voluntary” rule. You would submit an application, along with various documents that the lender might require to confirm your financial situation, such as bank statements and tax returns.
You have a right to negotiate the terms of the transfer.
Sign the Deed
After your lender has all the documentation and information it asked for, it will typically approve the deed in lieu. The last step involves signing the deed that transfers ownership of your property back to the lender. The lender should send you the deed when you've received approval.
The lender will also ask you to sign a statement or signed certification that you’re signing the deed of your own free will – no one, particularly the lender, coerced you into the agreement. This statement is called an estoppel affidavit in some states.
The statement might also include the exact terms of your agreement, including whether the lender has any right to pursue you for the difference if it ends up selling the property for less than the mortgage you owed. This is referred to as a deficiency action. This information might also be contained in a third document called a settlement agreement.
How Long Does a Deed in Lieu Take?
The deed in lieu timeline isn’t carved in stone – it can depend on circumstances unique to your case and your lender – but a deed in lieu is typically completed in a fraction of the time it would take the bank to foreclose. Expect about 90 days to pass while the lender assesses the value of your home and – hopefully – approves your request. The lender should then send you the necessary documents to close the deal.
Can a Bank Refuse a Deed in Lieu of Foreclosure?
There are times when a mortgage company might not jump at the chance to accept a deed in lieu. One of the most common reasons for denying a homeowner’s request involves second mortgages or other liens against the property.
Normally, in a foreclosure action, holders of these junior mortgages might not get paid if the property doesn’t ultimately sell for enough to cover both the first mortgage and pay them besides – it’s why they’re referred to as “junior” liens. But in a deed for lieu situation, the senior lender, your mortgage company, would inherit responsibility for these other loans when it accepts ownership of your property.
Of course, if your mortgage company also holds that second mortgage or mortgages, this isn’t a problem.
How Long Does a Deed in Lieu of Foreclosure Stay on Your Credit?
Your credit will almost certainly take a hit if you choose this option, but generally not as much as it would if the bank had foreclosed. It won’t be a huge difference, however. The bottom line is that you defaulted on your mortgage and those missed payments will still appear on your credit report.
In most cases, a deed in lieu will appear on your report as a “debt settled for less,” and this information will camp there for seven years, affecting your credit score. But you might still qualify for another mortgage within three years or so, while you would have to wait as long as seven years after a foreclosure.
Is It Better to Do a Short Sale or Deed in Lieu?
The terms “deed in lieu” and “short sale” aren’t necessarily mutually exclusive. Both indicate that the lender received at least some settlement of the mortgage you owed. A short sale means that it accepted less from the new buyer than your outstanding loan. A deed in lieu can mean the same thing because the lender is going to turn right around and sell your property again after you transfer the deed. It’s accepting the expected value of your property as payment, regardless of whether that value is more or less than your outstanding mortgage balance.
That said, you might be better able to dodge a deficiency action if you opt for a deed in lieu rather than a short sale. You have a bit more ability to negotiate because dollars and cents aren’t yet on the table – the lender doesn’t know yet if the property is going to eventually sell for more or less than your mortgage balance.
And, of course, you won’t have to go through all the work and trouble of listing your property for sale, marketing it, finding a short sale buyer, then getting the bank to approve the short sale.
Other Perks of a Deed in Lieu
Perhaps the greatest advantage of opting for a deed in lieu involves your future. Some lenders will actually chip in a little cash to help you relocate. This is particularly the case with Fannie Mae and VA loans, an arrangement known as “cash for keys.”
And you might even be able to remain living in your home for a while longer, at least until the lender sells it and replaces your mortgage with a new one from someone else. You can sometimes rent the property until this happens. This is called a “deed for lease” and it’s also common with Fannie Mae loans.
- AllLaw: Deed in Lieu of Foreclosure Process and Information
- NOLO: Do I Need a Lawyer for a Deed in Lieu of Foreclosure?
- Property Metrics: When a Deed in Lieu Is a Friend Indeed
- Wells Fargo: Releasing Your Home to Wells Fargo
- Homeownership.org: The Deed in Lieu of Foreclosure Process
- Attorneys’ Title Guaranty Fund: Deeds in Lieu of Foreclosure – Advantages, Disadvantages and Drafting
- Consumer Financial Protection Bureau. "What Is a Deed-in-Lieu of Foreclosure?" Accessed July 10, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed July 10, 2020.
- Consumer Financial Protection Bureau. "What Is A Short Sale?" Accessed July 10, 2020.
- Southwest Riverside County Association of Realtors. "Risks and Benefits of a Deed in Lieu of Foreclosure." Accessed July 10, 2020.
- Experian. "What Does Deed in Lieu of Foreclosure Mean?" Accessed July 10, 2020.
- Homeownership.org. "Deed-in-Lieu of Foreclosure." Accessed June 26, 2020.
- IRS. "Real Estate Property Foreclosure and Cancellation of Debt Audit Technique Guide," Page 6. Accessed July 10, 2020.
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.