Avoid Foreclosure with a Deed in Lieu of Foreclosure
A deed in lieu is one option if you want to walk away from your home without going through foreclosure.
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If you want to simply hand over ownership of your house to the lender and get your loan canceled in exchange, you can propose something called a deed in lieu of foreclosure. If your lender agrees, it will accept a deed to your property and in exchange, promise to not initiate foreclosure proceedings or to drop them if they’ve already begun. You don’t have to sell the house; the lender will do that for you.
Getting a lender to accept a deed in lieu of foreclosure is a hard sell these days. The problem is that the lender wants cash, not real estate—especially if it already owns hundreds of other properties because they failed to sell at foreclosure auctions.
On the other hand, if the bank thinks it’s a better deal to take your offer than to incur the expense of foreclosure, it will be a done deal. As with short sales, it will be helpful for you to work with a HUD-approved housing counselor. (See our article on how a HUD-approved housing counselor can help you.)
Before the lender will accept a deed in lieu of foreclosure, it will probably require you to put your home on the market for a period of time (three months is typical). Banks would rather have you sell the house than have to sell it themselves. Lenders seldom have real estate services as part of their operation, and so they must contract with real estate companies to unload their properties, often at a steep discount.
You can’t use a deed in lieu of foreclosure if you have multiple mortgages or if you have liens on the property, such as those arising from delinquent taxes, work on your home, or money judgments. You must be able to deed clear title to the whole property. In other words, you can’t do two deeds in lieu of foreclosure and split the property between the first and second mortgage lenders, or other lienholders.