Deed in Lieu of Foreclosure
A Deed in Lieu of Foreclosure is a legal instrument which is used to convey all rights and interests of real property from the homeowner (mortgagor/borrower) to the lender/servicer (mortgagee /lender-servicer) to satisfy a mortgage loan that is in default and thereby avoiding foreclosure proceedings.
A Deed in Lieu of Foreclosure is exactly as it sounds, the homeowner signs over the deed of the property to the lender in lieu of (instead of) the lender foreclosing, the lender takes title to the property, the homeowner is relieved from the mortgage obligation and the homeowner vacates the property in good repair.
There are benefits to the homeowner and to the lender. If the homeowner is unable to maintain mortgage payments and it appears that the homeowner’s financial situation is not going to change in the near future, the lender may entertain accepting a Deed in Lieu of Foreclosure. However, the lender may ask the homeowner to place that property on the open market with a Realtor, or attempt a Short Selling the property prior to accepting a Deed in Lieu.
As well, if there are any junior liens encumbering the property (2nd or 3rd mortgages, etc.), the mortgage lender may not want to accept a Deed in Lieu of Foreclosure. The basic reason is that a foreclosure sale will eliminate payments to any junior lien holders and if the 1st mortgage lender (the senior lien holder) accepts a Deed in Lieu when there are junior liens on the property, the senior lien holder would be responsible for payments of or responsible for pay-off of the junior lien(s).
The main benefit to the lender is that the lender can take title to the property right away instead of having to wait out the full foreclosure process, which can become very expensive. In states which utilize the judicial foreclosure process, the lender may have to wait greater than twelve (12) months before the judicial foreclosure process takes its course, which makes it that much more expensive the for lender to foreclosure and the chances of recouping their losses lessens greatly.
The homeowner does benefit as well, by transferring title to the lender the homeowner is not only relinquished from any further financial obligation that was on that property but the lender also agrees not to sue the homeowner for a Deficiency Judgment.
