Many homeowners can't keep up with their mortgage payments. This could happen if your income drops, your property taxes rise, or your general expenses increase to a point where something has to give. When a property owner is in this position, a deed in lieu of foreclosure, also called a mortgage release, might be the best option.
What is a deed in lieu of foreclosure?
As the name implies, a deed in lieu of foreclosure lets a borrower avoid full-fledged foreclosure proceedings, lessening (though not eliminating) the damage to that borrower's credit. When you use this foreclosure alternative, you voluntarily transfer your property's title to your mortgage lender, as opposed to having your mortgage lender come after you for the title.
Of course, if you're not underwater on your mortgage loan -- meaning your home is worth at least as much as your remaining mortgage balance -- there's always the option to sell it and unload those unaffordable mortgage payments. Real estate doesn't always appreciate, and when your home is worth less than your remaining loan balance, things get trickier. At that point, you have a couple of options to pursue with your lender: a short sale or a deed in lieu of foreclosure.
Many people are familiar with short sales -- your lender agrees to let you sell your home for whatever the market commands and effectively lets you off the hook for the amount it’s short (hence the name). A deed in lieu of foreclosure is a less common transaction, but it may be worth considering if you just can't pay your mortgage debt.
Why might a bank agree to a deed in lieu of foreclosure?
The foreclosure process can be lengthy and costly to lenders who have to hire a foreclosure attorney and pay for legal fees. A deed in lieu of foreclosure is voluntary on the homeowner's part, so there's less drama and fewer expenses involved. Also, homeowners who fall behind on their mortgages tend to fall behind on property maintenance. With a deed in lieu of foreclosure, lenders can generally get their hands on delinquent properties sooner, thereby lowering the risk of extensive neglect.
What's in it for you?
Clearly, banks have plenty to gain by agreeing to a deed in lieu of foreclosure. But what do homeowners have to gain?
For one thing, you'll likely face less damage to your credit score. Though a deed in lieu of foreclosure remains on your credit report for up to seven years, just like a regular foreclosure, your credit score may not drop as far as it would with a regular foreclosure.
Furthermore, a deed in lieu of foreclosure could protect you from further financial losses. With a regular foreclosure sale, in many states, your lender can be granted a deficiency judgment and come after you for whatever balance isn't paid on your mortgage and for foreclosure costs, but with a deed in lieu of foreclosure, there's the option for a settlement agreement by negotiating the delinquent balance down to a lower amount or even eliminate it (though you may be liable for taxes on the portion of your mortgage that's forgiven debt).
Also, in some cases, a mortgage company might agree to give you some money to help you vacate your home and find a new one as part of the deal, sparing you that added expense when you're having financial difficulty.
Remember, your lender wants you out of that property as soon as possible once it's clear you can't keep up with it. Throwing some money at you is a good way to achieve that.
Is a deed in lieu of foreclosure the right solution for you?
If you're underwater on your mortgage, your best solution is generally to get your lender to agree to a short sale. This way, your lender writes off your remaining mortgage balance and you don't have to worry about being sued for the difference. But if your lender refuses to agree to a short sale, a deed in lieu of foreclosure may be a better route to take than sitting back and waiting for foreclosure.