Deed in Lieu of Foreclosure: Definition & Effects

Instructor: Shawn Grimsley
Sometimes homeowners cannot avoid defaulting on their home loans. That doesn't necessarily mean they must suffer through foreclosure. In this lesson, you'll learn about deeds in lieu of foreclosure and what they entail. A short quiz follows.

Deed in Lieu of Foreclosure Defined

Lucy and Jude have a problem. Lucy recently lost her job and the family can no longer keep up on their mortgage payments. Making matters worse, they purchased during the real estate bubble and their mortgage is underwater, which means that the outstanding balance on a home loan is greater than its current fair market value. Consequently, they have been unable to sell it. Even though the bank is willing to accept a short sale where the house is sold for less then the balance due on the loan, no buyers are biting.

The bank has sent the required notice to commence foreclosure proceedings where a court will supervise the sale of the property to pay off the loan. Filing bankruptcy won't help Lucy and Jude because they will either have to give up the house anyway or still owe money on the very mortgage loan they can't afford; so there's no sense in demolishing their credit even further with a bankruptcy filing. The couple, however, can try to convince their lender to take a deed in lieu of foreclosure.

A deed in lieu of foreclosure is simply a deed that a defaulting borrower gives to the lender to avoid foreclosure proceedings. In other words, Jude and Lucy will deed ownership of their home to the bank to satisfy the mortgage loan. Their bank then will try to sell the house on its own.

Deeds in lieu of foreclosure are usually recognized as a full satisfaction of the loan so the lender can't pursue Lucy and Jude for any outstanding balance (called a deficiency). However, it's important to carefully check the law in your state and your lender to confirm the bank cannot pursue a deficiency judgment after you give a deed in lieu of foreclosure.

Process & Obstacles

A lender doesn't have to accept a deed in lieu foreclosure and will only do so if it believes that accepting it will be the best way to mitigate a loss on the loan. Keep in mind the banks are not real estate companies; they don't want to own property, and it costs money to maintain, market and sell properties.

Before a bank will consider accepting a deed in lieu of foreclosure, Lucy and Jude will almost certainly have to jump through some hoops. The bank may require proof that Lucy and Jude actually are unable to pay their loan obligations, such as a personal financial statement with supporting documents establishing their assets and income.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account