What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is an arrangement in which a homeowner voluntarily transfers ownership of the home to the lender (or, for some FHA loans, to HUD) to avoid the foreclosure process. It is a type of loss mitigation that requires the servicer's agreement. It may release the borrower from the remaining mortgage debt, but whether any deficiency is waived depends on the agreement and state law.
What the law says
- A deed-in-lieu of foreclosure is an arrangement where you voluntarily turn over ownership of your home to the lender to avoid the foreclosure process; it is one type of loss mitigation. CFPB, Mortgage key terms
- A deed-in-lieu may help you avoid being personally liable for any amount remaining on the mortgage. If you live in a state where you are responsible for any deficiency, the CFPB says to ask your lender to waive it, and to get any waiver in writing. CFPB, Mortgage key terms
- Freddie Mac describes a deed-in-lieu as voluntarily transferring the property title to your mortgage company in exchange for canceling your mortgage debt, and says it is generally for borrowers who have exhausted all other options. Freddie Mac, Options to leave your home
- Freddie Mac says your loan servicer may offer an incentive to help you transition to more affordable housing after a deed-in-lieu. Freddie Mac, Options to leave your home
- FHA's handbook defines a deed-in-lieu as a loss mitigation home disposition option in which a borrower voluntarily offers the deed in exchange for a release from all obligations under the mortgage. HUD, FHA Single Family Housing Policy Handbook 4000.1, Glossary and Acronyms
- Under FHA rules, a lender may accept a deed in lieu without special approval from an individual borrower who certifies they own no other FHA-insured or FHA-held property, provided the mortgage is in default and the deed conveys good marketable title; corporate borrowers and borrowers with multiple such properties need HUD's prior written consent. 24 CFR 203.357, Deed in lieu of foreclosure (FHA), via GovInfo
- The CFPB lists a deed-in-lieu of foreclosure among the options a servicer might offer if you can't pay your mortgage, along with refinancing, modification, repayment plans, forbearance, and short sales. CFPB, If I can't pay my mortgage loan, what are my options?
- The IRS lists a voluntary transfer of property to the lender among the events that can result in canceled debt, and says canceled debt is generally taxable unless an exclusion applies. IRS, Topic No. 431, Canceled debt - Is it taxable or not?
FAQ
Is a deed in lieu the same as a short sale?
No. In a short sale you sell the home for less than what you owe; in a deed-in-lieu you voluntarily turn ownership over to the lender. Both are types of loss mitigation.
Will I still owe money after a deed in lieu?
It may help you avoid personal liability for the remaining balance. In states where borrowers can be responsible for a deficiency, the CFPB says to ask the lender to waive it and get the waiver in writing.
Can I just hand the keys to my lender?
A deed-in-lieu is an option your servicer may or may not offer. The CFPB says to contact your servicer and complete its assistance application; the servicer will tell you which options, if any, are available.
How does a deed in lieu compare with foreclosure?
The CFPB says options such as a deed-in-lieu are typically cheaper, faster, and less damaging to credit than foreclosure.
Could a deed in lieu have tax consequences?
The IRS lists a voluntary transfer of property to the lender as an event that can result in canceled debt, which is generally taxable unless an exclusion applies.
Related
- Buying a Foreclosed Home: What to Know
- How Long Does a Foreclosure Stay on Your Credit Report?
- The Foreclosure Process Step by Step
- Foreclosure Surplus Funds: Who Gets the Money Left Over?
- How to Stop or Avoid Foreclosure
- What Is Foreclosure? (Including Pre-Foreclosure and REO)
- Foreclosure & Homeowner Law by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.