When you're nearing foreclosure and don't have a way to work out your loan with your lender, you essentially have two choices. You can let your bank take your home through the foreclosure process, or you can give your home back to your lender through a deed in lieu of foreclosure. The latter process is usually accomplished through executing a quit claim deed.
The Foreclosure Process
While the foreclosure process varies by state, the general outline is the same. After you go a period of time without making payments, your bank files a notice of foreclosure with a court or, in most cases, by notifying you and advertising the notice. If you don't cure the foreclosure, your property will go through a process called a sheriff's sale where it gets auctioned off to a buyer, frequently your bank, who can buy the property with the proceeds going to your lender to pay off your loan. After the sheriff's sale, you still get a period of time to stay in your house while you work to "redeem" the loan and pay it off. Depending on your state and its laws, you could be able to stay in your house for months even after the foreclosure notice gets filed.
Two key problems come with being foreclosed, other than the obvious one that you're losing your house. The first is that it significantly damages your credit. It's not uncommon for a foreclosure to lower your credit score by 100 to 150 points. Even if you can manage the damage to your credit score, a foreclosure could make you ineligible for a mortgage from three to seven years.
Deed In Lieu
When you do a deed in lieu of foreclosure, you give the ownership of your property back to the bank. Typically, you finish the process by executing a quit claim deed. Quit claim deeds are documents that transfer title without making any promises. In essence, all that you're doing is telling the bank that it can have whatever rights you have to the property, if any. Doing this with the bank's permission gets you out of owning your house without having a foreclosure on your credit report, though your credit does take a hard hit from the deed in lieu.
Quit Claim Challenges
Technically, you could quit claim your property to your lender at any point. If you did that, though, you'd lose your house, but you wouldn't get out of your responsibility under your promissory note. The only way to quit claim your property to your lender and get out of responsibility for the loan is to do it with its permission and its agreement to waive the right to pursue you for any shortfall between what you owe and the value of your property.
- U.S. Department of Housing and Urban Development: Are You at Risk of Foreclosure and Losing Your Home?
- MyFICO: Credit Missteps – How Their Effect on FICO Scores Vary
- Zillow: Boomerang Buyers: Buying Again After a Foreclosure or Short Sale
- RealtyTrac: Deed in Lieu
- CFPB. "Early intervention requirements for certain borrowers." Accessed June 8, 2020.
- Nolo.com. "Mortgage Contracts Often Require a Breach Letter." Accessed June 8, 2020.
- Nolo.com. "What's the difference between a notice of default and notice of sale?" Accessed June 8, 2020.
- Avvo.com. "Reinstatement vs. Redemption." Accessed June 8, 2020.
- ABA. "Foreclosure Mediation." Accessed June 8, 2020.
- Nolo.com. "Your Rights In a Foreclosure." Accessed June 8, 2020.
- CornellLaw. "Application of Proceeds of Disposition; Liability for Deficiency and Right to Surplus." Accessed June 8, 2020.
- Casetext. "Obduskey v. McCarthy & Holthus LLP." Accessed May 28, 2020.
- FTC. "Fair Debt Collection Practices Act (FDCPA)." Accessed June 8, 2020.
- Nolo.com. "What's the difference between a breach letter and a FDCPA letter?" Accessed June 8, 2020.
- U.S. Congress. "H.R. 748 – CARES Act." Accessed June 8, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.