How to Use a Deed in Lieu of Foreclosure to Sign Over Your Home
A deed in lieu of foreclosure (DIL) is an option for avoiding foreclosure but still break free from unaffordable house payments. You can voluntarily transfer ownership to your lender—your deed—instead of or in lieu of waiting for them to foreclose on your home.
You would essentially sign the deed over to them, and your lender releases you from the obligation to make any further payments toward your mortgage loan.
How a Deed in Lieu of Foreclosure Works
A DIL transaction is a way to get rid of your home if you find that you’re unable to afford your mortgage payments, you can't get a loan modification, and you're unable to sell your home.
The process isn't without repercussions, however. There are a couple of disadvantages.
Your Credit Report
A DIL looks slightly different on your credit report than a standard foreclosure does because it's not quite as damaging, but the result is similar. Your bank takes ownership of the property and sells it to pay off your loan, and in many cases, your credit score will drop.
You might be able to borrow again sooner, however, and a loan officer that reviews your credit report (as opposed to a computerized scoring model) at a later time might view a DIL more favorably than a foreclosure.
Your credit will probably come out a little better with a DIL if you have no options other than foreclosure, such as a short sale, a loan modification, or an open-market sale.
A Deficiency Balance
Your house might sell for less than what you owe on your mortgage when your lender sells it after accepting a deed in lieu. The sale proceeds won't be sufficient to pay off your loan. Your lender might try to collect that deficiency from you if this happens, so your loan won't yet be completely behind you.
But you can have the deficiency wiped out in a DIL transaction in some cases, or you might be able to negotiate for a lesser deficiency.
Review your DIL agreement carefully with a local attorney, and ask a tax professional about any liability you might have for the forgiven debt or other aspects of the deal.
The Time Frame
A DIL can move along more quickly than other options. You can stop making your monthly payments and move on to more affordable housing sooner, but the financial difference might not matter if you’ve already stopped making payments and are waiting for foreclosure. A DIL sets things in motion so that you can hopefully buy again or rebuild your credit more quickly. Expect around 90 days for processing time.
Some DIL programs help you get back on your feet. You might be able to live in your home for up to three months rent-free, or you might receive relocation assistance (up to $3,000 in some cases) to ease your transition.
A DIL is less public than a foreclosure. It's an agreement between you and your bank—not a legal proceeding authorized by your state that could appear in public records.
The Advantage to Lenders
Banks also benefit when you use a DIL. Foreclosure is an expensive and time-consuming process, and it's risky for lenders. They’d rather put an end to things quickly and with less paperwork if it's inevitable that they're going to have to take a property back.
That said, banks don’t always agree to let you release your home this way. And a DIL might not be an option if you have other liens on your home, such as a second mortgage.
Pros and Cons of a Deed in Lieu
As with any recourse in a tough financial time, there are both advantages and disadvantages to a DIL, but they balance in may cases.
- Credit Scores: A deed in lieu of foreclosure damages your credit, but not as badly as a foreclosure, and you might not have other options. The worst case scenario is that you’re going to miss monthly payments and eventually default on your loan anyway.
- New Housing: You must move out of your home. You'll have to find somewhere else to live when the bank takes possession of the property.
- Limited Relief: A DIL is just an agreement between you and your primary mortgage lender. You're still responsible for paying any money you might owe to others, such as a second mortgage, HOA expenses, or property taxes.
Other Possible Options
A short sale can be a better option than a DIL. You still might be able to get any deficiency waived with a short sale, and you would do less damage to your credit.
A loan modification might also offer a less-drastic solution, and refinancing might also provide relief.
Steps in the Deed in Lieu of Foreclosure Process
You must work with your lender to get a mortgage release, and every lender has different requirements for this. Call and ask about the process. Let them know you’re unable to make your payments, and ask what steps you should take. Some aspects of the process are relatively common, however.
- Contact your lender, explain your situation, and ask to begin the DIL process. You might have to fill out an application and gather financial details about your budget and payments.
- Provide documents that show your income, monthly expenses, and bank account balances. Your lender needs to understand that you’re facing an impossible hardship and that there’s no way you’re going to be able to pay.
- Respond to requests for additional details, and allow time for your lender to process your request. Expect to wait 30 days or more before you get an answer, but it never hurts to call and ask for a status update. Nothing will happen quickly, but the process should still be faster than a foreclosure.
- Seek legal advice if you're approved. Consult with a local real estate attorney before you sign any final documentation, and throughout the entire process. This will cost several hundred dollars, but any “misunderstanding” could easily cost you ten times as much or more. Pay particular attention to how any deficiency will be treated.
- Leave the property clean and in good condition when it's time to move out. Remove all personal belongings and debris so the property is ready to go on the market.
The Bottom Line
Ask your lender about other alternatives that might be available before you sign on the dotted line. A short sale, loan modification, refinance, or other options might be on the table. Discuss these possibilities with a tax advisor and an attorney as well so you can choose the best solution for your personal circumstances.