What Is a Deed in Lieu of Foreclosure? How Does It Work?

What Is a Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is a document that transfers the title of a property from the property owner to their lender in exchange for relief from the mortgage debt. Choosing a deed in lieu of foreclosure can be less damaging financially than going through a full foreclosure proceeding.

Key Takeaways A deed in lieu of foreclosure is an option taken by a mortgagor—often a homeowner—usually as a means of avoiding foreclosure.It is a step that's usually taken only as a last resort, when the property owner has exhausted all other options, such as a loan modification or a short sale.There are benefits for both parties, including the opportunity to avoid time-consuming and costly foreclosure proceedings.

Other Ways To Avoid Foreclosure

A deed in lieu isn’t your only option to avoid foreclosure. Let’s examine a few other choices you have when you can’t make your mortgage payments. 

Loan Modification

A loan modification might be right for you if you can’t make your mortgage payments but you want to remain in your home. A loan modification means your lender changes the interest rate on your loan to match current market rates.

You may owe more on your home than it’s worth. In that case, your lender may be able to put the excess principal in a forbearance account. While in forbearance, the excess principal doesn’t build interest. This can stop you from falling further into debt while you pay off what you owe. The amount in forbearance is due when you pay off the rest of the loan.

Like a deed in lieu agreement, a lender has no obligation to modify your loan. Work with your lender to try to find a solution that’s beneficial for both of you.

Short Sale

You may be able to sell your home through a short sale if you can’t get a modification or you don’t want to keep living in your home. A short sale means you sell the home for less than the amount that’s left on your mortgage.

Most short sales take place because property values have gone down in your area. During a short sale you communicate with buyers, show your home and talk to real estate agents just like a normal sale. However, unlike a normal sale, your lender needs to approve the short sale before it goes through.

You may or may not still owe money after a short sale. Some states (like California) have laws that ban deficiencies after a short sale. If you have a deficiency, your lender may sue and take you to court to get a deficiency judgmentIf you aren’t prepared to pay the difference between what’s left on your loan and the amount your home sells for, be sure to ask your lender to waive their right to sue for deficiency.


Deficiency Judgments Following a Deed in Lieu of Foreclosure

A deed in lieu is often structured so that the transaction satisfies the mortgage debt. So, with most deeds in lieu, the bank can’t get a deficiency judgment for the difference between the home’s fair market value and the debt.

But if the bank wants to preserve its right to seek a deficiency judgment, most jurisdictions permit the bank to do so by clearly stating in the transaction documents that a balance remains after the deed in lieu. The bank generally needs to specify the amount of the deficiency and include this amount in the deed in lieu documents or in a separate agreement.

Whether the bank can pursue a deficiency judgment following a deed in lieu also sometimes depends on state law. Washington, for example, has at least one case that states a loan holder may not obtain a deficiency judgment after a deed in lieu, even if the consideration is less than a full discharge of the debt. (See Thompson v. Smith, 58 Wash. App. 361 (1990)). In the Thompson case, the court ruled that because the deed in lieu was effectively a nonjudicial foreclosure, the borrower was entitled to protection under Washington’s anti-deficiency laws.

Should You Consider Letting the Foreclosure Happen?

In some states, a bank can get a deficiency judgment against a homeowner as part of a foreclosure or after that by filing a separate lawsuit. In other states, state law prevents a bank from getting a deficiency judgment following a foreclosure. If the bank can’t get a deficiency judgment against you after a foreclosure, you might be better off letting a foreclosure happen rather than doing a deed in lieu of foreclosure that leaves you liable for a deficiency.

Generally, it might not be worth doing a deed in lieu of foreclosure unless you can get the bank to agree to forgive or reduce the deficiency, you get some cash as part of the transaction, or you receive extra time to stay in the property (longer than what you’d get if you let the foreclosure go through). For specific advice about what to do in your particular situation, talk to a local foreclosure lawyer.

Also, you should take into consideration how long it will take to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for instance, will buy loans made two years after a deed in lieu if there are extenuating circumstances, like divorce, medical bills, or a job layoff that caused you economic difficulty, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting period for a Fannie Mae loan is seven years after a foreclosure or four years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) treats foreclosures, short sales, and deeds in lieu the same, usually making it’s home loan insurance available after three years.

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Pros and cons of a deed in lieu

Homeowners who have exhausted all of their options might find a deed in lieu to be a more favorable solution because the impact to their credit is generally less harmful than a foreclosure.

“While it is still likely to impact your credit negatively, certain lenders may look more favorably upon borrowers who completed a deed in lieu agreement rather than foreclosure,” Parker says.

The costs, also, are generally lower for both the lender and homeowner when it comes to a deed in lieu, notes Parker, because the litigation and process of selling the property are removed.

The biggest cons are the borrower’s loss of the property and any income or investments associated with it. Most homeowners struggle with surrendering the home they put so much effort into purchasing and maintaining.

“Making and accepting that hard decision is the first hurdle,” Boies says. “Once the decision is made, many homebuyers finally get the peace of mind they’ve been looking for. The deed in lieu represents a less damaging method of relinquishing your home.”

Another disadvantage is that the homeowner will not be in control of the sale of their home, and how much the mortgage company recoups once sold.


Although both options are similar, there are some differences that are important to know. It is also important that the required processes are properly followed and that all documents are checked for legal sufficiency and to insure that lenders cannot seek deficiency judgments. However, if the proper steps are taken, then regardless of which option is chosen, they both provide homeowners with an attractive alternative to facing a foreclosure.


First, we’ll evaluate you for programs that allow you to keep your house. If there aren’t other options, and you have been unable to sell your house through a short sale, a deed in lieu may be possible. You’ll need to provide:

  • Loan number
  • Foreclosure notices or dates you’ve received
  • Subordinate liens on the property, if applicable
  • Information on a loan modification, if you were considered for one
  • A letter explaining your current financial difficulty

Depending on your circumstances, we may need additional documentation. If so, we’ll contact you to let you know what information is needed. You’ll also be connected with a Customer Relationship Manager who’ll work with you throughout the process.

How a Deed in Lieu of Foreclosure Works

Banks sometimes offer homeowners the option of a deed in lieu rather than approve a short sale. It can be less expensive and a faster option than foreclosure for lenders. Foreclosure means going through a court process in many states.

A short sale involves selling the property for less money than what is still owed on the mortgage. Sellers can get out from under a mortgage this way if the bank allows the sale and agrees to waive the deficiency.

Always seek professional advice before agreeing to a deed in lieu. You can contact the Consumer Financial Protection Bureau at (855) 411-CFPB to be connected with a counselor approved by the Housing and Urban Development.

Homeowners in distress can reach out to their lenders to find out if a deed in lieu is an option. This involves submitting an application, along with proof of your financial situation. Each lender's rules for the process can vary. Some banks might require that a home be listed for sale first so there's a chance for a short sale before they accept a deed in lieu.

Each party must sign the title-transferring document when both parties agree to the deed in lieu. It must be notarized. It becomes part of the public record, just like other property transfers.

Downsides of Deeds in Lieu of Foreclosure

Understand that your lender is under no obligation to offer a deed in lieu of foreclosure and that some mortgages under certain servicing agreements may not be eligible for such an arrangement. If there’s a significant shortfall between the amount owed on the loan and the value of the property, the lender may require you to pay additional money to reduce its loss.

Obviously, the better shape the home is in, the more likely it is that you’ll be able to arrange a deed in lieu. And if there is a second or even a third mortgage on the home, including a home equity loan or home equity line of credit, the other, subordinate lenders will need to release their liens and sign off on the arrangement. If the primary mortgage lender is eager to take possession of the property, the lender may offer to pay the other lien holders to arrange a deal. But those additional loans against the home will complicate getting a deed in lieu.

One downside to a deed in lieu is that you may face taxes on the amount of your forgiven debt, which the IRS considers income. The taxable amount is the total debt at the time it was forgiven minus the fair market value of the home at that time. For example, if the outstanding mortgage debt at the time of the deed in lieu arrangement was $180,000 and the market value of the property was $150,000, the homeowner could owe tax on $30,000.


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If your deed in lieu request is approved, you’ll get a letter outlining the terms and conditions as well as documents that you’ll need to sign and return.

Once received, we’ll prepare the final release documents which will detail your decision to sign the property over to us. You must send us signed, notarized release documents within 14 calendar days.

Once submitted, you may have up to 30 calendar days to relocate, depending on the law in your area. Depending on your loan type and circumstance, you may qualify for funds to help with relocation expenses1 and other housing debts. We’ll let you know.

When the deed in lieu is finalized, this settles the mortgage and any other loans against the property. The amount of debt satisfied by this transfer of ownership is based on the approved value of your home. In some cases, you may be responsible for a remaining balance of the mortgage debt over and above the approved value (also known as the deficiency).

If we forgive any amount of mortgage debt, there may be possible tax consequences. Please consult a tax advisor for more information about how this could affect you.

We’ll report the sale to the major credit reporting agencies as “deed received in lieu of foreclosure on a defaulted mortgage.”

Advantages of a deed in lieu of foreclosure

For the homeowner, there are several advantages of getting a deed in lieu of foreclosure.

  1. Your credit may be less damaged. While a deed in lieu of foreclosure may still show on your credit report, it may carry less stigma than an actual foreclosure.
  2. You won’t pay as much or all of any deficiency. If you owe more than your house is worth, that’s a deficiency. In many states, you’re responsible for paying this deficiency to your lender if they foreclose, along with any interest and penalties that accrue. With a deed in lieu of foreclosure, you may be able to negotiate this deficiency so the terms are more favorable for you, or possibly eliminate it completely. There could be tax implications, so be sure to check with your personal tax advisor.
  3. You could get some cash. If there isn’t a deficiency, the local real estate market is strong and they could come out ahead on the deal, some lenders might offer you a "cash for keys" Arrangement. You could get some money for moving expenses and a new place to live in exchange for vacating the property quickly and leaving it in good condition.

Many lenders will be willing to take these steps to resolve the problem since it can be less hassle and expense for them.

Deed in Lieu vs. Foreclosure

Deed in lieu and foreclosure sound similar but are not identical. In a foreclosure, the lender takes back the property after the homeowner fails to make payments. Foreclosure laws can vary from state to state, and there are two ways foreclosure can take place:

  • Judicial foreclosure, in which the lender files a lawsuit to reclaim the property
  • Nonjudicial foreclosure, in which the lender can foreclose without going through the court system

The biggest differences between a deed in lieu and a foreclosure involve credit score impacts and your financial responsibility after the property has been reclaimed by the lender. In terms of credit reporting and credit scores, having a foreclosure on your credit history can be more damaging than a deed in lieu of foreclosure. Foreclosures and other negative information can stay on your credit reports for up to seven years.

Note You can dispute a foreclosure on your credit report with the credit bureaus, but this doesn't guarantee that it will be removed.

When you release the deed on a home back to the lender through a deed in lieu, the lender generally releases you from all further financial obligations. That means you don't have to make any more mortgage payments or pay off a remaining loan balance. With a foreclosure, the lender could take additional steps to recover money that you still owe toward the home or legal fees.

Important If you still owe a deficiency balance after foreclosure, the lender can file a separate lawsuit to collect this money, potentially opening you up to wage and/or bank account garnishments.

Why a Lender Would Reject a Deed in Lieu of Foreclosure

It’s not always in your loan servicer’s best interest to agree to a deed in lieu of foreclosure. Here are some situations where they might reject your request:

  • You haven’t exhausted your other options. If you haven’t tried selling your home or working out a loan modification, you may not be eligible to sign over your deed.
  • Your home is in bad shape. It will be harder for the lender to sell the property and recoup what you owe, so they may not be willing to let you take the easier way out.
  • The property’s title is not clear. If you have other liens against your home, such as unpaid property taxes, a contractor’s lien, a homeowners/condo association lien or a second mortgage, these will need to be paid off or released.
  • Your financial hardship is not long term. Buying a home and taking out a mortgage are long-term commitments. Financial circumstances that could turn around in the short term and allow you to resume making mortgage payments are not grounds for walking away.