Deed in Lieu

Deed in lieu of foreclosure is a process in which you give away your property to the lender because you just can't pay any more. The lender then sells off the property in order to retrieve a part or whole of the loan balance you owe.

When you go for a deed in lieu to avoid foreclosure, you need to sign legal documents such as the Agreement in Lieu of Foreclosure and a Warranty Deed, Quit Claim Deed or a Grant Deed. The first document reveals the terms and conditions of the Deed In Lieu, and is signed by both the lender and the borrower. The second document, which is the deed, conveys legal ownership of the property to the lender.

The lender marks the borrower's note as "paid" and provides the latter with two forms – one which states that the debt is cancelled and the other which refers to the waiver of the right to a deficiency judgment (the lender's right to ask for the unpaid debt amount if it is not received totally by the property sale.)

The agreement for the Deed In Lieu of foreclosure is executed through an escrow company which receives the borrower's note (marked as "paid") from the lender. The escrow company then records the deed used for transferring legal ownership of the mortgaged property and sends the note to the borrower. The borrower is thus released from the liability of the mortgage payments. There may be tax consequences so you may want to consult your accountant on this.

Getting a loan modification is surely a better option because it allows you to keep your home. At the same time, you can save your credit from taking a big hit. That's because a modification allows you to negotiate for a lower rate on your mortgage or a principal reduction on your loan balance or both. Other solutions may also be applicable.