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What Is a Deed-in-Lieu of Foreclosure?

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A deed in lieu of foreclosure involves a homeowner transferring ownership of their house to their mortgage lender instead (“in lieu”) of going through the foreclosure process. It’s just one way to avoid foreclosure, however, and isn’t right for everyone facing difficulties making their mortgage payments.

How a deed in lieu of foreclosure works

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 in doing so may be able to stay in the house longer, avoid paying the difference between your home’s value and your outstanding loan balance and get help covering your relocation costs. A deed in lieu’s impact on your credit will be roughly the same as the impact of a short sale or foreclosure, however.

A deed in lieu of foreclosure is usually a choice of last resort. If you’re eligible for a refinance, mortgage modification, forbearance, lump-sum reinstatement or short sale, you should pursue those options first.

A deed in lieu 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 facing a long-term financial hardship.

You’re underwater on your mortgage (meaning that 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.

You don’t have a lot of equity in the home.

Your mortgage payments aren’t affordable and you’re ready to walk away from your home.

Lenders aren’t obligated to agree to a deed in lieu, but they often do — especially in states that require judicial foreclosures, a process that involves the court system — in order to avoid the longer and more costly foreclosure process. The first step will be to reach out to your lender, then let them know the details of your situation and that you’re considering a deed in lieu. You’ll then have to fill out an application and submit supporting documentation about your income and expenses.

Based on your application, the lender will assess:

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

If your lender agrees to the deed in lieu, you’ll work with them to determine the best option for you to transition out of homeownership. If you get a Fannie Mae mortgage release, your choices will include leaving the home immediately, living there for up to three months rent-free or leasing the home for 12 months. The lender may require that you attempt to sell the house before the deed in lieu can proceed.

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.

Documents you’ll have to sign for a deed in lieu

To finalize the deed in lieu, you’ll be required to sign a deed, the legal document that allows you to transfer ownership (or “legal title”) of the property to someone else.

You’ll also need to sign an estoppel affidavit, which spells out in detail what you and your lender are agreeing to. If your lender agrees to forgive your deficiency — the difference between your home’s value and your outstanding loan amount — the estoppel affidavit will also reflect this. The forgiven mortgage debt may be excluded from your income when you file your federal tax return for that year — but you should do your research because it isn’t a guarantee. Plus, the IRS will still know about the income, as your lender is required to report it on Form 1099-C.

What can prevent you from getting a deed in lieu

Here are some common issues that make a deed in lieu unacceptable to many lenders:

Encumbrances, tax liens or judgments against the property Banks often don’t want to agree to a deed in lieu when the property has any legal action other than the original loan attached to it. In those cases, the lender has an incentive to go through foreclosure, as it’ll get rid of at least some of these (for instance, any liens other than the original loan will be cleared by a foreclosure).
Payment requirements If the loan is owned by a mortgage-backed security, it’s possible that it has a pooling and servicing agreement (PSA) attached to it. If it does, the borrower may be required to pay some amount toward the debt in order for the owners of the mortgage-backed security to agree to a deed in lieu.
Low home value If your home has depreciated in value significantly, it may not make financial sense for the lender to agree to a deed in lieu. Lenders may pursue foreclosure instead if you’re offering to hand over a house that has very little value, requires extensive repairs or isn’t sellable.

How a deed in lieu impacts your credit

Your credit score may drop by a range of 50 to 125 points after a deed in lieu of foreclosure, depending on where it stood before the deed in lieu, according to FICO data. The impact is slightly less severe than a foreclosure filing, though, which may drop your credit score by as many as 160 points.

When is a deed in lieu of foreclosure a good idea?

As mentioned above, most people pursue a refinance, loan modification, mortgage forbearance or short sale before a deed in lieu. All of these options, excluding a short sale, will allow you to stay in your home.

Deed in lieu vs. foreclosure

Because a deed in lieu and a foreclosure affect your credit roughly equally, in some cases there may not be a compelling reason to choose one over the other. If your lender won’t offer relocation assistance, release you from the obligation to pay the deficiency or let you stay in the home longer, you really don’t have much incentive to pursue a deed in lieu rather than a foreclosure.

Deed in lieu vs. short sale

While they’re both foreclosure prevention and loss mitigation options, a deed in lieu 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.

Deed in lieu of foreclosureShort sale
You must get approval from your lenderYou must get approval from your lender
Ownership transfers to the lenderOwnership transfers to a buyer
You may owe the difference between your home’s appraised value and loan amountYou may owe the difference between your home’s sales price and loan amount
You may qualify for relocation assistanceYou may qualify for relocation assistance
Fairly straightforward and takes around 90 daysComplex and typically takes over three months
Your credit score may drop by 50 to 125 pointsYour credit score may drop by 85 to 160 points

Pros and cons of a deed in lieu of foreclosure

  Your outstanding mortgage debt might be forgiven   You'll lose ownership of your property and eventually have to move out
  Your credit score will drop by fewer points than if you had chosen foreclosure   Your credit report will show the deed in lieu for seven years
  You may receive up to $3,000 in relocation assistance  Your credit score may drop by up to 125 points 
  You may qualify to stay in the home for up to a year as a renter  You may have to pay the difference between your home’s value and mortgage balance 
  You’ll have more privacy than with a foreclosure, as the deed in lieu agreement isn't a matter of public record  You may have to pay taxes on any debt your lender forgives as a part of the deed in lieu agreement 
  You’ll avoid the possibility of eviction

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.

Moving forward from a deed in lieu of foreclosure

You may feel hopeless about your ability to buy a home again after signing a deed in lieu or losing a home to foreclosure. But the good news is that, as long as you recover financially, you’ll be able to qualify for a mortgage after a foreclosure or deed in lieu.

Each loan type has its own mandatory waiting periods and qualification requirements for buyers who have a deed in lieu on their record, listed in the table below. Most waiting periods are the same for a deed in lieu and a foreclosure.

Loan programWaiting periodWith extenuating circumstances
Conventional4 years (vs. 7 years for a foreclosure)2 years
FHA3 yearsLess than 3 years
VA2 yearsLess than 2 years
USDA3 yearsLess than 3 years


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