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Deed in Lieu of Foreclosure: What Is It?

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The thought of losing the home you worked tirelessly to hold onto can bring about feelings of defeat and failure, but it doesn’t have to end with the dreaded process of foreclosure.

Weigh all your loss mitigation options, including what’s called a deed-in-lieu of foreclosure. This arrangement, which is also referred to as a “mortgage release,” allows you to sign over ownership of your home to your lender and potentially get rid of your remaining mortgage balance.

Keep reading for a thorough understanding of how deed-in-lieu of foreclosure works.

When you’re behind on mortgage payments

Sometimes life gets in the way and financial circumstances prevent you from paying your mortgage on time. In cases where you’re experiencing a minor setback that makes you slightly late on your monthly mortgage payment, by a week or two for example, you can likely take advantage of the built-in grace period for payments — provided your lender offers it. It’s common for lenders to give borrowers a 15-day buffer before charging a late fee.

However, if you’re several months behind and unable to catch up, you can lose your home to foreclosure, which means your lender takes back ownership of your property and forces you to vacate. A foreclosure transaction delivers a devastating blow to your credit history. Your credit score will drop significantly and the foreclosure ruling stays on your credit report for at least seven years, making it difficult for you to pursue homeownership again for years to come.

Foreclosure takes place unless you have an active application for one of a handful of alternatives, which can include a deed-in-lieu of foreclosure.

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What is a deed-in-lieu of foreclosure?

A deed-in-lieu of foreclosure keeps you from entering the foreclosure process by allowing you to voluntarily give up ownership of your home to your lender. It may also free you from the responsibility of repaying your remaining mortgage balance, according to the Consumer Financial Protection Bureau (CFPB).

The Federal Trade Commission says you’ll lose whatever equity you’ve built in your home, but you might be able to exclude the forgiven mortgage debt from your income when filing your federal taxes. The forgiven debt still has to be reported to the IRS, though.

According to the government-sponsored enterprises Fannie Mae and Freddie Mac, a deed-in-lieu of foreclosure might make sense for you if:

  • You’re behind on your mortgage payments or anticipate that you will be behind in the near future.
  • You’re ineligible for a mortgage modification, forbearance, reinstatement, short sale or refinance.
  • You’re facing a long-term hardship.
  • You’re upside-down on your mortgage.
  • You recently filed for bankruptcy.
  • You either can’t or don’t want to sell your home.
  • Your home is no longer affordable and you’re ready to let it go.

Once you complete the eligibility process — which involves your lender assessing the property’s value, your remaining loan balance and your hardship situation — you’ll need to determine the mortgage release option that works best for you. Your choices may include leaving the home immediately, staying put for up to three months rent-free or leasing the home for up to 12 months.

It typically takes about 90 days to complete a mortgage release. Keep in mind that if you have any liens on the property, you may not be eligible.

Deed-in-lieu of foreclosure pros and cons

Before you decide to pursue a deed-in-lieu of foreclosure arrangement, consider its benefits and drawbacks.


  • Your outstanding mortgage debt might be forgiven.
  • You avoid the more damaging effects of foreclosure.
  • You may receive up to $3,000 — or up to $10,000 for certain states — in relocation assistance.
  • You may qualify to stay in the home for up to a year.


  • You give up ownership of your property and eventually have to move out.
  • A deed-in-lieu of foreclosure is reported to the credit bureaus.
  • Your credit score will drop significantly.
  • If you’re underwater on your mortgage, your lender may require you to pay the difference between your mortgage balance and the home’s value.

What’s next?

Unfortunately, once you complete the mortgage release process, the property belongs to your lender and you won’t be able to reclaim ownership. If you’re underwater at the time of your mortgage release and your lender decides to waive underwater amount or “deficiency,” the CFPB recommends that you get the waiver in writing.

While it won’t hurt you nearly as much as a foreclosure filing, which can knock down your credit score by as much as 160 points, a deed-in-lieu of foreclosure negatively affects your creditworthiness. Your credit score can drop by approximately 50 to 125 points, depending on your credit score range, according to FICO data.

The good news is that it’s possible to get back into the homebuying game sooner than you may think. You may qualify for a conventional loan in as little as two years, or in three years for an FHA loan. The waiting period for foreclosures is usually up to seven years.

If you believe a deed-in-lieu of foreclosure is a viable option for your financial situation, reach out to your mortgage lender or an HUD-approved housing counselor for next steps.


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