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What Is a Deed-in-Lieu of Foreclosure?

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A deed-in-lieu of foreclosure allows you to transfer ownership of your home to your lender. It may also qualify you to get rid of your remaining mortgage balance without repaying it. This type of mortgage assistance is one way to avoid foreclosure.

What is a deed-in-lieu of foreclosure?

A deed-in-lieu of foreclosure, also called a “mortgage release,” allows you to avoid the foreclosure process by releasing you from your mortgage payment obligation. You voluntarily give up ownership of your home to your lender, and may avoid paying the difference between your home’s value and outstanding loan balance, according to the Consumer Financial Protection Bureau (CFPB).

Fannie Mae and Freddie Mac, two major agencies that buy and sell mortgages, suggest that a deed-in-lieu of foreclosure might make sense for you if:

  • You’re already behind on your mortgage payments or expect to fall behind in the near future.
  • You’re ineligible for a mortgage modification, forbearance, reinstatement, short sale or refinance.
  • You’re facing a long-term financial hardship.
  • You’re underwater on your mortgage (meaning your loan balance is higher than the home’s value).
  • You’ve recently filed for bankruptcy.
  • You either can’t or don’t want to sell your home.
  • Your mortgage payments are no longer affordable and you’re ready to walk away from your home.

How a deed-in-lieu of foreclosure works

Once you’ve decided on a deed-in-lieu to avoid foreclosure, reach out to your lender to learn whether you’re eligible and if the lender will agree to it. Your lender will assess:

  • Your home’s current value.
  • Your outstanding mortgage balance.
  • Your financial hardship.
  • Your other liens on the property, if applicable.

You’ll also work with your lender to determine the best option for you to transition out of homeownership. Your choices include leaving the home immediately, living there for up to three months rent-free or leasing the home for 12 months.

If your lender agrees to forgive your deficiency, or the difference between your home value and loan amount, get the agreement in writing. The forgiven mortgage debt may be excluded from your income when you file your federal tax return for that year, but it still has to be reported to the IRS.

It typically takes about 90 days to complete a mortgage release, according to Fannie Mae. Once the deed-in-lieu of foreclosure process is completed, the home belongs to your lender and you won’t be able to reclaim ownership.

How a deed-in-lieu impacts your credit

After a deed-in-lieu of foreclosure, your credit score may drop by a range of 50 to 125 points, depending on where it stood before the deed-in-lieu, according to FICO data. The impact isn’t as severe as a foreclosure filing, though, which may drop your credit score by as much as 160 points.

Deed-in-lieu vs. short sale

While they’re both foreclosure prevention options, a deed-in-lieu of foreclosure differs from a short sale in a few ways.

A short sale means you’re selling your home for less than what you owe on your mortgage. This may be an option if you’re underwater on your home and are having trouble selling it for an amount that would fully repay your mortgage.

However, with a deed-in-lieu, you transfer ownership directly to your lender and not a typical homebuyer. Let’s compare the two options.

Comparing a deed-in-lieu vs. a short sale
Deed-in-Lieu of Foreclosure Short Sale
You must get approval from your lender. You must get approval from your lender.
You transfer ownership to your lender. You transfer ownership to a homebuyer.
You may owe the difference between your home’s appraised value and loan amount. You may owe the difference between your home’s sales price and loan amount.
You may qualify for relocation assistance. You may qualify for relocation assistance.
The process can take about 90 days. The process can take up to 120 days.
Your credit score may drop by as many as 50 to 125 points. Your credit score may drop by as many as 85 to 160 points.

Pros and cons of a deed-in-lieu of foreclosure


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


  • You lose 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 may drop by up to 125 points. 
  • You may have to pay the difference between your home’s value and mortgage balance. 

How to request a deed-in-lieu from your lender

There are two actionable steps you can take if you’d like to request a deed-in-lieu of foreclosure

  1. Reach out directly to your mortgage servicer, whose contact information can be found on your most recent mortgage statement.
  2. Enlist the help of a local housing counseling agency that’s approved by the U.S. Department of Housing and Urban Development.

Depending on how long you’ve been behind on your mortgage payments, you may have to complete a borrower response package, which includes submitting income and financial hardship documentation.

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 after a deed-in-lieu, or in three years for a Federal Housing Administration (FHA) loan. The waiting period after a foreclosure can be up to seven years.


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