What Is Deed In Lieu Of Foreclosure?

Deed in lieu of foreclosure is a term used by mortgage lenders to mean the homeowner gives up their ownership of the home to the lender in order to avoid a foreclosure action against them.  There may be any number of reasons why a homeowner wants to give up ownership of their home and a foreclosure is a huge negative mark on one’s credit score.  For the mortgage lender a foreclosure action can be a lengthy and costly process.  This article explores deed in lieu of foreclosure and why a homeowner may want to choose that option.

How Does A Deed In Lieu Of Foreclosure Work?

Sometimes deed in lieu of foreclosure is referred to as jingle mail since the homeowner is literally mailing the keys of their home to the lender as a statement that they are giving up their ownership of the home.  The process is not that simple though as title to the home needs to be transferred back to the lender.  Usually this can be done by signing the deed over to the mortgage lender and filling out any other paperwork the lender requires.

Generally, lenders are willing to take a deed in lieu of foreclosure since it will be less costly than pursuing the foreclosure process.  Of course, this assumes that there are no other liens or other loans secured by the property.  If there are tax liens, mechanics liens, home equity loan liens on the home that could make the process a little more difficult for the primary mortgage lender.  If the home still has equity in it the mortgage lender may be willing to accept deed in lieu of foreclosure and discharge all the other liens on sale on closing.  If on the other hand the equity is negative the primary mortgage lender may not be able to take the home using the deed in lieu of foreclosure process since there are other liens that need to be paid off as well.

Why Would A Homeowner Use Deed In Lieu Of Foreclosure Option?

There could be many reasons why a homeowner opts for the deed in lieu of foreclosure process.  They may have lost their job, had their pay cut, or overpaid on the home to the point where the mortgage is no longer affordable to them.  Whatever the reason may be, giving up the home and not having to go through the foreclosure process will allow them to recover faster and be able to buy a more affordable home down the line.  

A foreclosure will stay on one’s credit report for seven years which can be costly.  One can lose 100-200 or more points on their credit score from a foreclosure action.  That means higher interest rates on credit cards, car loans, personal loans and more.  It can make finding a new place to live more difficult since many rental places also perform credit checks as part of their application process.  There is also a waiting period for buying another home with a mortgage.  That waiting period for a VA/FHA mortgage is two to three years and can be up to eight years for a conventional mortgage!  That is a long time to have to wait before being eligible for applying for a mortgage again.

How A Home’s Value Affects Deed In Lieu Of Foreclosure?

A home’s value in relation to the mortgage will play an important part in the process of the lender deciding whether or not to accept the deed in lieu of foreclosure.  If the home has plenty of equity, meaning the value of the home is more than the value of the loan, it is a much easier decision for the lender to make since their loan will be covered when the home is sold.  In the case where the home has more value than the mortgage is worth the homeowner will receive the difference after all expenses (mortgage balance, taxes, closing costs, real estate commissions etc.) have been paid.

The process becomes more difficult when the home’s value is at or below the value of the mortgage and/or there are other liens or loans secured against the home.  There are other fees involved with selling a home such as local transfer and sales taxes, commissions, and more.  The mortgage lender may be willing to pay some of those costs in order to avoid the foreclosure as well since as mentioned above it is also a costly and lengthy process for them as well.  Where the value of the home is much lower than the value of the mortgage or there are a number of liens on the property then the mortgage lender may not want to accept or may not be able to accept deed in lieu of foreclosure.

Should You Sell Your Home Before A Deed In Lieu Of Foreclosure?

If your home has plenty of equity in it, it may be a better option to put the home on the market and sell it.  That way you can instantly pocket any equity in the property and get rid of the mortgage at the same time.  In the current market we have today even selling a home in as-is condition when priced correctly will still find plenty of buyers willing to put in the work to make the home look great for them.  A homeowner who can do some preparation such as decluttering, painting, steam cleaning carpets and more may be able to keep more money in their pocket versus selling as-is.

The best bet would be to consult a local real estate agent and get their opinion on what they think the home would sell for.  If that selling price is higher than what is owed on the mortgage then the best option is to sell that home on the open market rather than wasting time hoping that a mortgage lender will take a home back using the deed in lieu of foreclosure.  Real estate agents can provide suggestions are to how best to prepare that home for sale given any budget so the homeowner need not be too concerned with the condition.

On the other hand if the home has very little equity in it or has negative equity then depending on the costs for selling the house (taxes, commissions, closing costs and more) the homeowner needs to make the decision whether it makes sense to pay those costs up front and start with a clean slate or see if the lender is willing to go with the deed in lieu of foreclosure route and cover some of the expenses.  The homeowner should be communicating with their lender to see what options will work out for the best.

Bottom Line

A deed in lieu of foreclosure could be an important strategy that helps a homeowner get out from under a mortgage they may no longer be able to afford.  Homeowners who have equity in their home may be better off selling they home on the open market.  The homeowner should be communicating with their lender and real estate agents to make the best decision going forward. 

Additional Resources

• Selling A Home In As-Is Condition - Learn about the postive and negative aspects of selling a home in as-is condition.  Even some minor home preparation can help with the sale of a home as this article explores. 
• Learn How Real Estate Comps Are Used To Help Price A Home - Real estate agents and home appraisers use comps to help determine the price or value of a home.  This article explores how those comps are obtained and what sorts of sources can be used to find those comps.
• A List Of Common Closing Costs - Learn about some of the common closing costs one can expect when buying or selling a home.

About the author: The above article “What Is Deed In Lieu Of Foreclosure?” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Adams, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.