What Is A Deed-In-Lieu of Foreclosure?

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 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 balances
• 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.

Consequences

It is important to contact a qualified mortgage modification company to discuss potential consequences of “walking away” from your home. Consequences vary case-to-case. However, in California the law is generally favorable to the homeowner/borrower.