How to Use a Deed in Lieu of Foreclosure to Sign Over Your Home
Deed in lieu of foreclosure (DIL) is an option for avoiding foreclosure and breaking free of unaffordable housing payments. Instead of waiting for a lender to foreclose on your home, you can voluntarily transfer ownership to the lender. Essentially, you sign the deed over, and your lender releases you from the obligation to make payments.
How Deed in Lieu of Foreclosure Works
When you’re unable to afford mortgage payments, unable to get a loan modification, and unable to sell your home, a DIL transaction is a way to get rid of your home.
DIL looks slightly different on your credit reports than a standard foreclosure, but the result may be the similar. Your bank takes ownership of the property and sells it to pay off your loan, and in many cases, your credit scores will drop. But you might be able to borrow again sooner, and a loan officer that reviews your credit reports (as opposed to a computerized scoring model) might view DIL more favorably than foreclosure.
When your lender sells your house, the house might sell for less than you owe. When that happens, the loan proceeds are not sufficient to pay off your loan. What happens to the money you still owe? Your lender may try to collect that deficiency, which means your loan is not yet completely behind you. But, in some cases, you can have the deficiency wiped out in a DIL transaction, or you can negotiate for a smaller deficiency.
Review your agreements carefully with a local attorney, and ask a tax preparer about any liability you might have for forgiven debt (or other aspects of the deal).
DIL can be faster than other options, so you can stop making your monthly payments (and move on to more affordable housing). If you’ve already stopped making payments and are waiting for foreclosure, the financial difference might not matter. But DIL gets things in motion so that you can hopefully buy again or rebuild your credit more quickly. It’s wise to expect around 90-days for processing time.
Some DIL programs help you get back on your feet. You may be able to live in your home for three months rent-free, or you might receive relocation assistance (up to $3,000, in some cases) to ease your transition.
You might not care who knows about your dealings, but DIL is less public than foreclosure. It is an agreement between you and your bank—not a legal proceeding authorized by your state that could appear in public records.
Banks also benefit when you use DIL. Foreclosure is expensive, time-consuming, and risky for lenders. They’d rather put an end to things quickly.
That said, banks don’t always agree to let you release your home this way. If you have other liens on your home (including a second mortgage), DIL might not be an option.
Pros and Cons of Deed in Lieu of Foreclosure
- Credit Scores: Deed in lieu of foreclosure damages your credit. But you might not have other options, and if you’re going to miss monthly payments and eventually default anyway, that might not matter.
- New Housing: With DIL, you must move out of your home. Once the bank takes possession of the property, you’ll need to find somewhere else to live.
- Limited Relief: DIL is just an agreement between you and your primary mortgage lender. If you owe money to others (for a second mortgage, HOA expenses, taxes, and so on), you’ll still owe that money.
- Alternatives: In some cases, a short sale is a better option than DIL. With a short sale, you still might be able to get any deficiency waived (again, read through the agreements with a local attorney), and you might do less damage to your credit. Also, loan modifications might offer a less-drastic solution. Refinancing might also offer relief.
Steps in the Deed in Lieu of Foreclosure Process
To get a mortgage release, you need to work with your lender. Every lender has different requirements, so call and ask about the process. Let them know you’re unable to make your payments, and ask what steps to take.
Before you decide on DIL, ask your lender about all of the alternatives that might be available. A short sale, loan modification, refinance, or other options might be on the table. Discuss those options with a tax advisor and attorney to pick the best solution.
- Contact your lender, explain your situation, and ask to begin the DIL process. You may need 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 hear an answer, but it never hurts to call and ask for a status update. Nothing will happen quickly, but it should be faster than foreclosure.
- If approved, get advice. Before you sign any final documentation (and during the entire process), consult with a local real estate attorney. This will cost several hundred dollars, but any “misunderstanding” could easily cost ten times as much—or much more. Pay particular attention to how any deficiency will be treated.
- When it’s time to move out, leave the property clean and in good condition. Remove all personal belongings and debris so that the property is ready to go on the market.
Consumer Financial Protection Bureau. "What Is a Deed-in-Lieu of Foreclosure?" Accessed Dec. 22, 2020.
Rocket Mortgage. "Deed In Lieu Of Foreclosure: What To Know." Accessed Dec. 22, 2020.
Fannie Mae. "D2-3.3-02: Fannie Mae Mortgage Release (Deed-in-Lieu of Foreclosure)." Accessed Dec. 22, 2020.
U.S. Department of Agriculture. "Avoid Foreclosure." Page 2. Accessed Dec. 22, 2020.
Washington Department of Financial Institutions. "Short Sale Seller Advisory." Accessed Dec. 22, 2020.
Consumer Financial Protection Bureau. "What Is a Short Sale?." Accessed Dec. 22, 2020.