What Is a Deed in Lieu of Foreclosure?

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A deed in lieu of foreclosure is a process by which a homeowner may turn his home over to his mortgage lender. This spares both the borrower and the lender from enduring a lengthy and stressful foreclosure.

Foreclosure without the Paperwork

A deed in lieu is essentially a voluntarily foreclosure without going through the legal system. The borrower requesting a deed in lieu signs his title over to the lender. His home then serves as repayment for the loan. The borrower walks away from both his property and his obligation to repay the mortgage.

Credit Consequences

A deed in lieu of foreclosure can damage a borrower’s credit scores but usually not as much as a foreclosure. This is because a deed in lieu is reported as a derogatory entry on the original mortgage lender’s trade line but does not result in an additional derogatory public record, as a foreclosure would. A particularly savvy borrower may be able to negotiate with his mortgage lender to report the loan as “paid in full” and avoid credit damage altogether.

A Deed in Lieu Prevents a Deficiency

Some lenders won’t agree to a deed in lieu of foreclosure. The most common reason for a lender’s refusal to cooperate is that, should the borrower’s home be worth less than the value of the loan, the lender loses its right to legally pursue the lender for the deficiency. Thus, a deed in lieu of foreclosure can present a significant financial loss for a lender.