A deed in lieu of foreclosure (or a “deed in lieu” as it’s sometimes called) is the term for when a homeowner gives back all interest in a real property to the lender. It is also sometimes referred to as “giving the keys back” or “turning over the keys.”
A deed in lieu of foreclosure immediately releases the homeowner/borrower from most or all of the personal debt associated with the loan.
Advantages of a Deed In Lieu of Foreclosure
The borrower avoids the public notoriety of a foreclosure proceeding and might receive more generous terms than he or she would in a formal foreclosure. Like a short sale, a deed in lieu tends to result in less damage to a credit rating than a foreclosure. For a lender, a deed in lieu reduces the amount of time and expense to take back the property, and it may save the lender significant headache if the borrower would have otherwise filed for bankruptcy. It also minimizes the risk that the house they get back will be trashed by the occupants before they take off.
A lender does not have to agree to do a deed in lieu, and indeed lenders rarely agree to them — which is ironic considering you would think the bank would want to take back the house for free, right? In fact, the lender may be losing a lot of money it had previously loaned out by agreeing to the deed in lieu.
Homeowner Must Get Lender Approval
To get a deed in lieu, a borrower needs to ask for the lender’s permission to agree to the deed in lieu. Both sides must enter into the transaction voluntarily and in good faith. Sometimes, the lender will not agree to this procedure if the outstanding loan exceeds the current fair market value of the property, unless the lender concludes that they will end up with the property anyway and wants to avoid the cost and delay of foreclosure.
Because of the requirement that this procedure be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of the conveyance from the homeowner/borrower that specifically states that the offer to enter into negotiations is made voluntarily. After that is submitted, then both sides may then proceed with settlement negotiations.
John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County). He advises clients about various real estate and land use matters. He can be reached at (415) 250-8131 or firstname.lastname@example.org.
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