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Some mortgage servicers offer relocation assistance alongside a deed in lieu if the property is in good condition.
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A deed in lieu of foreclosure might help you avoid foreclosure if you can no longer afford your mortgage.
You voluntarily give your mortgage servicer the deed to your home and are relieved of your debt.
Taking this approach can be less damaging to your credit than a foreclosure.
If you’re behind on your mortgage payments and don’t see a way to catch up, a deed in lieu of foreclosure might be a good option.
A deed in lieu of foreclosure is a legal process where you voluntarily transfer the title of the home to your mortgage servicer. In exchange, your servicer cancels your debt. The arrangement lets you avoid foreclosure while minimizing the damage to your credit score.
Here’s what you need to know if you’re considering a deed in lieu of foreclosure.
What is a deed in lieu of foreclosure?
A deed in lieu of foreclosure (or “deed in lieu”) is a mutual agreement between you and your loan servicer where you voluntarily hand over ownership of your property and the servicer releases you from your mortgage obligations. It’s a proactive step you take instead of going through the foreclosure process. Your servicer might even offer benefits like relocation assistance if you keep the property in good condition.
“A deed in lieu of foreclosure can help homeowners avoid some of the worst effects of foreclosure,” says Jon Sanborn cofounder of SD House Guys, a home-buying company in San Diego, California.
First and foremost, it lets you skip the lengthy and stressful foreclosure process. What’s more, it can help you avoid a foreclosure on your credit report, which can severely damage your credit score and make it difficult to get future loans, Sanborn says.
Note: A deed in lieu of foreclosure may also be called a deed in lieu, mortgage release, surrender of possession agreement, voluntary liquidation, or voluntary conveyance.
How a deed in lieu agreement works
Obtaining a deed in lieu of foreclosure isn’t as simple as just requesting one. Instead, you and your loan servicer must agree to it. While the exact process varies by lender, here are the basic steps:
Contact your mortgage servicer — the company you send your mortgage payments to each month — to explain your situation and get the process started.Gather your financial documents, such as mortgage statements, bank statements, and pay stubs.Fill out the deed in lieu of foreclosure form and submit the requested documentation.Sign and notarize the title-transferring documents.
Ultimately, your servicer has the final say when it comes to accepting a deed in lieu of foreclosure. Your servicer might reject your request if:
You haven’t tried other options firstYour home is in poor conditionThere are liens or tax judgments on your propertyYour financial hardship is temporary
Important: You could still be on the hook for the difference between what you owe on your mortgage and your home’s worth, even with a deed in lieu of foreclosure. The Consumer Financial Protection Bureau recommends asking your servicer to waive that requirement in states where it applies.
Pros and cons of deed in lieu of foreclosure
A deed in lieu of foreclosure can be a more favorable option than an imminent foreclosure. Still, it’s important to consider the potential benefits and drawbacks before deciding whether a deed in lieu is right for you.
Pros
Cons
Cut your losses
Being proactive can limit how far behind you fall while avoiding the higher costs of foreclosure.
Less damage to your credit
A deed in lieu might remain on your credit report for less time than a foreclosure.
Get relocation assistance
The lender might offer cash to help you move if you keep the home in good condition.
Stay in your home longer
The lender might lease the home back to you for up to a year if you can pay fair market rent. In some cases, you might be allowed to stay in your home rent-free for up to three months.
Lose your home
You lose ownership of the house and have to move out eventually.Lose your equity
You lose the money you put into the home, including your down payment, mortgage payments, and the value of any improvements.Credit takes a hit
Your credit score will drop, and you won’t be able to get another mortgage for several years.Need lender approval
There’s no guarantee your lender will agree to a deed in lieu of foreclosure.Potential for a deficiency judgment
You might be on the hook for the difference between what you owe and your home’s worth. Tax implications.
You might owe taxes on the canceled or forgiven debt because the IRS classifies it as taxable income.
Is a deed in lieu of foreclosure a good idea?
A deed in lieu of foreclosure might make sense if you:
Don’t have much equity in the homeAre behind on your mortgage payments and don’t expect to catch up any time soonAre facing a long-term financial hardship, not just a temporary setbackAre underwater on your mortgageAre unable or unwilling to sell your home
Still, the decision to seek a deed in lieu should not be taken lightly. It’s helpful to consider the severity of your financial distress, your ability to find another place to live, and the effect on your credit score, Sanborn says. You should also consider whether you’re willing to give up ownership of your home in exchange for the loan being canceled, he adds.
While a deed in lieu can help you avoid foreclosure, there are other options for temporary or permanent financial relief, including:
Mortgage forbearanceMortgage refinanceFiling for bankruptcyLoan modificationShort sale
“The best option for each homeowner will depend on their individual circumstances,” Sanborn says.
If you’re having trouble affording your mortgage, reach out to your loan servicer and consider contacting a HUD-certified housing counselor for help exploring your options. It can also be helpful to speak with a licensed financial planner or advisor before making any decisions.