Deed-in-lieu of foreclosure: An arrangement where a homeowner voluntarily turns over ownership of their home to the lender to avoid the foreclosure process.
Deed-in-lieu of foreclosure: A written instrument that legally transfers all interest in a home to the bank, thereby satisfying outstanding debt payments. While the homeowner may eventually lose their rights to the home, it’s an alternative to foreclosure.
Deed-in-Lieu of Foreclosure: A Foreclosure Alternative
Deed-in-lieu of foreclosure, a process wherein the homeowner transfers the property to the bank, can be used in order to satisfy an outstanding debt. The lender is entitled to sell the property to recover the debt owed.
The advantage of a deed-in-lieu of foreclosure is that the homeowner is immediately released from any debt obligations. Also, the bank usually agrees to waive any claims related to the mortgage they may have against the homeowner.
“Banks sometimes require that homeowners attempt to sell the property for at least 90 days at fair market value before allowing a deed in lieu of foreclosure. Also, the property ordinarily must have clear title, which means there can’t be other liens on the home,” attorney Amy Loftsgordon says.
Homeowners are advised to read the deed-in-lieu of foreclosure agreement carefully.
“If a deed in lieu of foreclosure agreement does not contain language expressly stating that the transaction is in full satisfaction of the debt, the bank might later file a lawsuit to get a deficiency judgment,” Loftsgordon says.
Homeowners usually opt for a deed-in-lieu of foreclosure rather than a foreclosure when the value of the home less than the amount owed. However, banks won’t always agree to a deed-in-lieu of foreclosure, especially if the home has been used to secure a second mortgage or home equity line of credit.
Therefore, banks often ask the homeowner to put the home on the market for a period of time before agreeing to a deed-in-lieu of foreclosure. They will ask for full disclosure when it comes to income and assets in order to verify that the homeowner is incapable of meeting their mortgage payments.
“(A deed-in-lieu of foreclosure) allows (homeowners) to begin fresh sooner than they might if they were to go through the process of a full foreclosure,” says John Moran, a home mortgage specialist in Telluride, CO. “The mental toll on a family waiting to be foreclosed upon is pretty significant, so the deed in lieu gives them some control over the timeline.”