A deed in lieu of foreclosure is a document that transfers the title of a property from the mortgagor back to the mortgage provider or lender to avoid foreclosure. This is one potential option that a borrower can take where they deed the collateral property back to the bank in exchange for the release of all mortgage obligations.
For this to happen both sides–borrower and lender–must enter into the agreement in good faith and voluntarily.
The document is signed by the homeowner and then notarized by a notary public. Eventually, it will be recorded in the public records.
Both borrower and lender can benefit from a deed in lieu of foreclosure.
- Both parties are spared from costly and time-consuming foreclosure proceedings.
- The borrower is spared from public notoriety, with the possibility of leasing the property back from the lender.
- Enables lenders to assess certain risks attached to the property, including the worth of the property costing less than the remaining mortgage balance.
Unfortunately, a deed in lieu will have an impact on a borrower’s credit and their ability to buy another home.
Banks might reject a deed in lieu of foreclosure for the following reasons:
- Foreclosure is more profitable for the bank because the property has equity or that the bank receives financial incentives to foreclose from the federal government. In this case, they will refuse a deed in lieu and would rather have a property foreclosed.
- The property has junior encumbrances, tax lien or judgment that will become the bank’s responsibility if not released before the agreement for a deed in lieu of foreclosure.
- PSAs that service many loans prohibit deeds in lieu, resulting in banks refusing the title transfer.