Deed in Lieu of Foreclosure ExplainedYou may have heard the term, "Deed in Lieu of Foreclosure." Essentially, a "deed in lieu of foreclosure" is when a borrower gives all of the property to a lender in an effort to avoid a foreclosure on a defaulted loan. While this seems fairly drastic, this can help the borrowers avoid the financially and emotionally taxing efforts associated with foreclosure.
Many borrowers choose this option because they are immediately released from the debt associated with their defaulted mortgage. In addition, a borrower's credit score will be less damaged by a deed in lieu of foreclosure as oppose to going through a foreclosure.
Many lenders prefer this option, because it allows them to reduce the financial burden and time associated with repossessing a home and usually prevents the borrower retaliation that is common with foreclosure proceedings. However, if there are any liens associated with the home, the lender will much prefer to foreclose upon the home as it would make the title clearing process much easier.
When proceeding with a deed in lieu of foreclosure, both the borrower and the lender must enter into the agreement in good faith and voluntarily. During this process, the fair market value of the home is considered when reaching the agreement; the lender will often ask the borrower to write a letter expressing their voluntary participation in the agreement.