Using “deed in lieu” to stop a foreclosure sounds perhaps like a strange spell or magic trick. In fact, it is a simple transaction between the homeowner and the lender that has advantages for both parties. When a homeowner gets behind on the mortgage and has no options for getting the loan current, they can relinquish the property to the lender before it goes into foreclosure. In other words, the lender keeps the house and the borrower keeps a foreclosure off their credit.

Benefits of Deed in Lieu

When the homeowner gives the deed in lieu of foreclosure to the lender, any need for foreclosure proceeding is immediately eliminated. The lender can recoup their losses by selling the home, without having to go through all the time and expense of a foreclosure. A foreclosure can be expensive, factoring in the cost of legal counsel, court costs, costs of manpower including bank agents, sheriff’s deputies and auctioneers.

For the homeowner, they bypass the time and painfulness of a foreclosure proceeding. But the biggest advantage to the borrower is not having a foreclosure go onto his credit record, where it will stay for a number of years. Having a foreclosure on your credit can effect everything from getting a credit card to renting an apartment.

Deed in Lieu Process

It is best if a mortgage borrower in trouble can approach the lender about doing a deed in lieu before the lender has stated foreclosure procedures. Rarely does the lender immediately offer this to the borrower. A loan guaranteed through the Department of Veterans Affairs is one of the few exceptions to this. VA loans in default will often benefit from being offered deed in lieu of foreclosure.

If a lender agrees to a deed in lieu of foreclosure, certain forms are required to be signed by both parties. The actual deed will be signed over from the homeowner to the lender. In return, the lender will give the borrower a form noting that the mortgage debt is cancelled. However, and this is very important, the borrower is responsible for taxes associated with this forgiveness of debt.

A homeowner should consider if approaching the lender about a loan modification would benefit them more than a deed in lieu of foreclosure. While it is great to be out from under the mortgage debt, a deed in lieu leaves a borrower without a home. A modification to the home loan can significantly change the monthly payment and allow the borrower to stay in their home and pay the mortgage each month.