The Deed-in-Lieu of Foreclosure Process
Sometimes, when homeowners are in a situation where they simply can’t save their mortgages, we can still advise them to avoid foreclosure. A deed-in-lieu of foreclosure (frequently referred to as simply a deed-in-lieu) allows a borrower to surrender the property to the lender in exchange for getting out of all mortgage repayment obligations.
A deed-in-lieu of foreclosure can be a good option for both parties; the borrower avoids a foreclosure on their credit record, and the lender gets the property without the time, hassle, and expense of pursuing a foreclosure.
Here’s an example of how the deed-in-lieu process works. This isn’t a guide to follow; your situation may be unique, and you may need help from a qualified attorney. Credit.org doesn’t provide any kind of legal or tax advice, so nothing here should be taken as such.
- The borrower reaches out to the lender. The lender’s loss mitigation department is whom the borrower speaks with about getting a deed-in-lieu arranged. The lender will request more information from the borrower, most likely in writing.
- The borrower continues to live in the house, paying all utilities, Homeowners Association dues, taxes and etc., while pursuing the deed-in-lieu.
- The borrower completes the “hardship package”, which provides the lender with the written documentation they need. The borrower will likely be required to include bank statements, a hardship letter, tax returns, and pay stubs.
- An asset manager in the lender’s loss mitigation department will take up to 90 days to assess the home’s value and approve the request for the deed-in-lieu. Some options may be presented to the borrower; move out of the home right away, stay for up to 90 days rent-free, or pay to lease the home for up to 12 months.
- The borrower will sign documents prior to the closing of the property transfer. After closing, the borrower now has no further obligation to make payments toward the property.
- The borrower should leave the home clean and in good repair. In some cases, the lender will provide some financial assistance for the purpose of helping the family relocate; borrowers should ask about this early on if they need this kind of help, and obtain a copy of the agreed upon offer. Some lenders identify this program as a transition assistance program or cash-for-keys.
- The borrower may use the time after the deed-in-lieu to improve his/her credit score, pay down existing debts, and consider the opportunity for home ownership again in the future. HUD-approved housing counseling agencies, like credit.org, offer pre-purchase counseling to discuss those options.
Fannie Mae has more information about deed-in-lieu of foreclosure at its “Know Your Options” website, Mortgage Release™: Fannie Mae. Borrowers are always welcome to call us for free, one-on-one housing counseling and advice, including questions about the deed-in-lieu process. We don’t provide legal or tax advice, but we can help you understand your options and prepare you for whatever path you choose.