A deed in lieu of foreclosure is the process of reconveying title of property back to the lender so the lender does not have to initiate the expensive and time consuming foreclosure process. In exchange for conveyance, the lender usually cancels all personal indebtedness associated with the defaulted loan, which is a deed in lieu’s greatest benefit. A deed in lieu also hurts a borrowers credit score less than an actual foreclosure does.
In order to be considered a candidate for a deed in lieu, the indebtedness owed by the borrower must be secured by the real property being transferred. It is not possible to transfer other real property that is not collateral secured by the loan. The deed in lieu agreement must be voluntary on both sides and presented in good faith. In theory, the current loan balance should be equal to the fair market value of the property being conveyed, or the lender could refuse to accept a deed in lieu. As a practical matter, however, lenders will analyze the economics of the situation and may accept a deed in lieu if the alternative is a costly foreclosure. There are many intricate details involved with a deed in lieu of foreclosure and consumers contemplating this option should hire counsel familiar with the process in order to obtain the desired results.