What Is a Deed-in-Lieu of Foreclosure?

Why use LendingTree?

A deed in lieu of foreclosure involves a property owner moving ownership of their house to their mortgage lender rather (" in lieu") of going through the foreclosure process. It's simply one way to avoid foreclosure, however, and isn't best for everyone facing problems making their mortgage payments.

How a deed in lieu of foreclosure works

A deed in lieu of foreclosure - likewise called a "mortgage release" - permits you to avoid the foreclosure process by releasing you from your mortgage payment obligation. You voluntarily give up ownership of your home to your loan provider, and in doing so may be able to:

- Stay in your house longer
- Avoid paying the distinction in between your home's value and your impressive loan balance
- Get aid covering your relocation expenses

Lenders aren't obliged to accept a deed in lieu, but they frequently do to avoid the longer and more pricey foreclosure process.

Does a deed-in-lieu affect your credit?

Yes, a deed in lieu will negatively impact your credit report which impact will be approximately the exact same as the effect of a brief sale or foreclosure. That's one reason why a deed in lieu is typically a last option choice. If you're eligible for a refinance, mortgage modification, forbearance, lump-sum reinstatement or short sale, you should pursue those alternatives initially.

Deed in lieu of foreclosure process: 4 steps

1. Connect to your lender.

Let them understand the information of your scenario and that you're thinking about a deed in lieu. You'll then submit an application and send supporting documentation about your income and expenditures.

Based upon your application, the lender will evaluate:

- Your home's present value
- Your outstanding mortgage balance
- Your financial challenge
- Your other liens on the residential or commercial property, if any

2. Create an exit plan.

If your lender concurs to the deed in lieu, you'll deal with them to determine the very best method for you to shift out of homeownership.

For example, if you get a Fannie Mae mortgage release, your options will consist of leaving the home instantly, living there for up to 3 months rent-free or renting the home for 12 months. The lender might need that you attempt to offer your house before the deed in lieu can continue.

3. Transfer ownership.

To finish the process you'll sign documents that transfer the residential or commercial property to your lending institution:

- A deed, the legal document that permits you to move ownership (or "legal title") of the residential or commercial property to somebody else.
- An estoppel affidavit, which spells out in information what you and your lending institution are concurring to. If your lending institution agrees to forgive your shortage - the difference between your home's worth and your outstanding loan quantity - the estoppel affidavit will also reflect this.

Once you sign these, the home comes from your lending institution and you won't have the ability to recover ownership.

4. Assess your tax scenario.

If your loan provider consented to forgive a portion of your mortgage financial obligation as part of the deed in lieu, you might have to pay income tax on that forgiven debt. You might prevent this tax if you receive exemption under the Consolidated Appropriations Act (CAA). If you think you certify, consult a tax professional who can help you pin down all the details.

If you don't certify, be conscious that the IRS will know about the income, given that your loan provider is needed to report it on Form 1099-C.

Advantages and disadvantages of a deed in lieu of foreclosure

Pros

- Your exceptional mortgage financial obligation may be forgiven
- You might get several thousand dollars in in relocation assistance
- You may qualify to stay in the home for up to a year as an occupant
- You'll have some privacy, because the deed in lieu arrangement isn't a matter of public record
- You'll prevent the possibility of eviction

Cons

- You'll lose ownership of your residential or commercial property and ultimately have to move out
- Your credit report will show the deed in lieu for 7 years
- Your credit history might stop by 50 to 125 points on average
- You might need to pay the distinction between your home's value and mortgage balance
- You might need to pay taxes on any financial obligation your loan provider forgives as a part of the deed in lieu arrangement

What can avoid you from getting a deed in lieu?

Here are typical concerns that make a deed in lieu inappropriate to lots of loan providers:

- Encumbrances, tax liens or judgments against the residential or commercial property. Banks often do not wish to consent to a deed in lieu when the residential or commercial property has any legal action other than the initial mortgage connected to it. In those cases, the lender has an incentive to go through foreclosure, as it'll get rid of at least some of these (for instance, a foreclosure would clear any liens besides the original loan).
- Payment requirements. If the loan is owned by a mortgage-backed security, it's possible that it has a pooling and servicing agreement (PSA) connected to it. If it does, the borrower might be needed to pay some quantity towards the financial obligation in order for the owners of the mortgage-backed security to accept a deed in lieu.
- Low home value. If your home has considerably depreciated in value, it may not make financial sense for the lending institution to agree to a deed in lieu. Lenders might pursue foreclosure instead if you're offering to hand over a house that has extremely little worth, needs substantial repairs or isn't sellable.

Foreclosure or deed in lieu: Which is right for me?

- Typically triggers your FICO Score to drop by as much as 160 points

- Will stay on your credit report for up to 7 years.


- Typically causes your FICO Score to come by 50 to 125 points.

- Will stay on your credit report for up to 7 years, but you may have the ability to get approved for a brand-new mortgage in as little as 2 years.


A deed in lieu might make sense for you if:

- You're currently behind on your mortgage payments or anticipate to fall back in the near future.
- You're facing a long-term financial challenge.
- You're underwater on your mortgage (meaning that your loan balance is higher than the home's worth).
- You've recently submitted for bankruptcy.
- You either can't or don't desire to sell your home.
- You do not have a great deal of equity in the home.

Foreclosure might make more sense for you if:

- You have significant equity
- You have liens, encumbrances or judgments against the residential or commercial property
- Your lender isn't offering concessions, like relocation assistance, more time in the home or release from your obligation to pay the deficiency

Another alternative to foreclosure: Short sale

As mentioned above, most individuals pursue a refinance, loan modification, mortgage forbearance or short sale before a deed in lieu. All of these options, leaving out a short sale, will enable you to remain in your home.

Deed in lieu vs. short sale

A brief sale implies you're offering your home for less than what you owe on your mortgage. This might be a choice if you're undersea on your home and are having trouble offering it for an amount that would settle your mortgage.

However, with a deed in lieu, you transfer ownership straight to your lending institution and not a typical homebuyer.

- You must get approval from your lending institution


- You should get approval from your lending institution


- Ownership transfers to the lending institution


- Ownership transfers to a buyer


- You may owe the distinction between your home's evaluated value and loan quantity


- You might owe the distinction in between your home's list prices and loan amount


- You might certify for moving support


- You might certify for moving help


- Fairly simple and takes around 90 days


- Complex and typically takes control of 3 months


- Your credit score might drop by 50 to 125 points


- Your credit report may drop by 85 to 160 points


Moving forward after a deed in lieu of foreclosure

You might feel hopeless about your ability to buy a home again after signing a deed in lieu or losing a home to foreclosure. But fortunately is that, as long as you recover financially, you'll be able to get approved for a mortgage after a foreclosure or deed in lieu.

Each loan type has its own mandatory waiting durations and qualification requirements for purchasers who have a deed in lieu on their record, noted in the table below. Most waiting periods are the same for a deed in lieu and a foreclosure.

View mortgage loan provides from as much as 5 loan providers in minutes

Advertising Disclosures

Disclosure 1

Free LendingTree Services - Disclosure present as of 20-May-24

LendingTree is compensated by business on this website and this compensation may impact how and where deals appear on this site (such as the order). LendingTree does not consist of all lending institutions, savings products, or loan choices readily available in the marketplace.

What part of LendingTree's services in connection with my loan demand is totally free?

There is no expense to submit a loan demand, get matched with lending institutions and receive conditional loan offers or quotes. You may examine the conditional loan offers or quotes and talk to the lenders at no expense. Of course, the lender you select may require a cost to process your official loan application, appraisal, and/or credit report, but up until you agree to pay the loan provider any fee(s), you may go shopping with LendingTree at no charge.

How does LendingTree get paid?

LendingTree does not charge you, the customer, a fee for its services. Who pays our costs? The lending institution. Obviously, you will be accountable for paying any loan processing, closing expenses or other costs to the lending institution with whom you close.

LendingTree Advertisement Disclosure:

LENDINGTREE, LLC IS A MARKETING LEAD GENERATOR AND IS A PROPERLY LICENSED MORTGAGE BROKER, AS REQUIRED BY LAW, WITH ITS MAIN OFFICE LOCATED AT 1415 VANTAGE PARK DRIVE, SUITE 700, CHARLOTTE, NC 28203, TELEPHONE NUMBER 1-800-555-8733.

For a current list of appropriate state licensing and disclosures, click Licenses and Disclosures or call for information.

LendingTree, LLC NMLS Unique Identifier # 1136; AL Mortgage Brokers License # 8694;
AK Mortgage Broker/Lender License #AK 1136; AZ Mortgage Broker License # 0902469;
AR Mortgage Broker License # 24441; CA Department of Financial Protection & Innovation, CA Financing Law License # 6037234; CO Mortgage Company Registration Regulated by the Division of Real Estate, NMLS ID # 1136; CT Mortgage Broker License # 4164 - MORTGAGE BROKER ONLY, NOT A MORTGAGE LENDER OR MORTGAGE CORRESPONDENT LENDER; CT Small Lender License #SLC -1136; DE Broker License # 010996; DC Mortgage Broker License #MLB 1136; FL Mortgage Broker License #MBR 1298; GA Mortgage Broker/Processor License/Registration # 12989; HI Mortgage Loan Originator Company License #HI -1136; ID Mortgage Broker/Lender License #MBL -893; IL Residential Mortgage License #MB.0005433; IN-SOS Loan Broker License # 1136; IA Mortgage Broker License # 741; KS Mortgage Company License #MC.0002279; KY Mortgage Broker License #MB 17994; LA Residential Mortgage Lending License # 189; ME Loan Broker License # 1136; MD Mortgage Lender License # 1136; MA Mortgage Broker License #MB 1136 - LendingTree arranges but does not make loans; MA Small Lender License #SL 0533; MI 1st Mortgage Broker License #FL 0016258, second Mortgage Broker Registrant #SR 0016259; MN Residential Mortgage Originator License #MN-MO-40127258; MS Mortgage Broker License # 1136; MO Mortgage Company License # 1136, NMLS # 1136, 4509 Lemay Ferry Rd., St. Louis, MO 63129; MT Mortgage Broker License # 1097; NE Mortgage Banker License # 1517; NV Mortgage Company License # 1698, NV Bus. ID NV20051235630, Las Vegas Bus. License #P 50-02291; NH Mortgage Broker License # 1136MBR; NH Small Loan Lender License # 1136SM; NJ Residential Mortgage Broker License # 0801779 - LendingTree does not make mortgage loans or commitments or fund any mortgage loans; NM Mortgage Loan Company License # 00395; NM Small Lender License # 2048; NY - LT Technologies in lieu of true name LendingTree, LLC, Registered Mortgage Broker - NYS Department of Financial Services License #RMB 208974 - LendingTree sets up mortgage loans with third-party providers; NC Mortgage Broker License #B -113401; ND Residential Mortgage Lender License #ML 104625; ND Money Broker License #MB 100817; OH Residential Mortgage Lending Act Certificate of Registration #RM.802159.000, 1210 Louden St. # 2, Cincinnati, OH 45202; OK Mortgage Broker License #MB 002490; OK Credit Services Organization License #CSO 00394; OR Mortgage Lending License #ML -1862; OR Consumer Finance License # 0420-001-C; PA Mortgage Broker License # 20298; RI Loan Broker License # 20062113LB; SC Mortgage Broker License #MB -0504600, SC Branch Location NMLS ID # 234375; SD Foreign Corporation Entity #FL 002607; SD Mortgage Brokerage License # 1136. MB; TN Mortgage License # 1136; TN Industrial Loan and Thrift Company Registration # 1136; TX SML Mortgage Company License, NMLS ID # 1136, Mr. Shan Guo Residential Mortgage Loan Originator # 300978, 6300 Stonewood Dr, Ste. 406, Plano, TX 75024; UT DRE Mortgage Entity License # 5489470-NMLC; VT Mortgage Broker License # 0055 MB; VA Mortgage Broker License #MC -1052; WA Mortgage Broker License #MB -1136; WV Mortgage Broker License #MB -20020; WI Mortgage Broker License # 2630BR; WY Mortgage Broker License # 838. Licensing info last modified on 02-Apr-25.

Advertised Terms and Information

- The information and disclosures above connect to marketed terms made by or through LendingTree.
- Rate of interest and terms are from a loan provider or lending institutions with whom LendingTree may match you which provide the particular product. The disclosures are current as of the date indicated.
- LendingTree is not a lending institution in any transaction and does not make loans, loan commitments or lock-rates. All credit choices, consisting of loan approval and the conditional rates and terms you are provided, are the responsibility of the getting involved lenders and will vary based upon your loan request, your specific financial circumstance, and requirements figured out by the lending institutions to whom you are matched. Not all customers will qualify for the marketed rates and terms. APR might remain in lieu of refunds or rewards. Dealer involvement might affect customer cost.
- You may not be matched with a lending institution making a specific conditional loan deal, and LendingTree does not ensure that any loan provider will make you a conditional loan offer. LendingTree sets up for multiple conditional loan deals through its network of nonaffiliated lenders. See the Regards To Use Agreement for more details. The Terms of Use Agreement governs these marketed Terms and Information.
- FICO rating implies the FICO credit history report that a lender receives from a consumer reporting firm.