It's unlikely that you would want to negotiate a deed in lieu as anything other than a last resort to stave off foreclosure. The process involves giving your home to your lender in exchange for relief from the obligation to pay your home loan. Not all lenders require that you be behind in your mortgage payments to give them a deed in lieu, but if you can continue to make payments, you may have better options.
Some lenders only require that you be struggling to make your mortgage payments – not that you've actually missed any – before they'll consider a deed in lieu of foreclosure. This involves proving that you're unable to pay both your mortgage and your other expenses. At the end of the month, something typically goes unpaid, but it does not necessarily have to be your mortgage. Other mortgage companies require that you've missed at least one payment, however, and some suggest that you may not want to consider a deed in lieu unless you're seriously behind.
You must meet other requirements to qualify for a deed in lieu as well. By the time you work through them, you might have sold your property instead, or you may actually be able to keep your home. For example, some lenders require that you list your house for sale for a prescribed period of time and attempt at least a short sale, where the lender will approve the sale even if it's for less than your mortgage balance. You must also usually attempt a loan modification first, and if you're successful, your payments may be more manageable so you can afford them. Typically, you must also prove that you've experienced some hardship that's altered your finances, such as illness or job loss. Most important, you can't have any other liens against your property – you must be able to transfer ownership to your lender free and clear, and you must turn over the property to your lender in good, clean condition.
If you meet all the requirements and your lender agrees to accept a deed in lieu of foreclosure, a federal program may provide you with a little cash to help you establish yourself in a new home. The Home Affordable Foreclosure Alternatives program, part of the Making Home Affordable Program, provides assistance to lenders to make one-time payments of $3,000 to qualified borrowers who have successfully negotiated a deed in lieu. Originally scheduled to sunset in December 2012, the federal government has extended HAFA through December 2013. One requirement of this cash-back program is that your mortgage payment be at least two months behind. You must also show that your cash assets are worth less than $5,000, or three times your monthly mortgage payment, whichever is greater.
A deed in lieu typically absolves you of any responsibility for paying any part of your mortgage, even if your lender ends up selling the home for less than what you owe. There may be a few associated costs that can eat into any financial assistance provided by your lender, however. Some lenders require you to pay fees associated with recording the new deed that transfers ownership of your property.
- Bank of America: Signing Your House Over to Your Lender
- IndyMac Mortgage Services: Foreclosure Prevention Options
- Freddie Mac: Home Affordable Foreclosure Alternatives (PDF)
- California Association of Realtors: HAFA Short Sales Continue to Grow
- PennyMac Loan Services: Step-by-Step Guide to Deed in Lieu of Foreclosure
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.