Deed in Lieu: Tap into Home Equity Instead

With foreclosure looming, you might be desperately looking for any alternative that can save your credit and prevent you from going through the foreclosure process. When you negotiate with your lender, they may offer a deed in lieu of foreclosure. 

But what exactly is a deed in lieu of foreclosure, and is it wise to accept? Let us break down this topic in detail.

What Is a Deed in Lieu of Foreclosure?

In many cases, a mortgage borrower may need to avoid foreclosure or a short sale of their property. If they don’t qualify for a loan modification for their real estate arrangement, they can sometimes offer a deed in lieu of foreclosure to get out of foreclosure proceedings. 

A deed in lieu of foreclosure is a financial option usually offered by a mortgage lender. With a deed in lieu of foreclosure, a current homeowner can give their mortgage lender the deed to their home to avoid foreclosure. In this way, the mortgage lender takes sole possession of the property. 

Why do this? As a homeowner, if you hand over the deed to your home, the lender then releases the tax lien on the property. They do this to recoup some financial losses without forcing you, the homeowner, into foreclosure

You escape your mortgage debt and a potential deficiency judgment that often comes with a deficient balance. Meanwhile, the lender then gets to sell your home for fair market value to recover the remaining funds on the loan balance. 

By providing the lender with your deed, the lender agrees to release you from all other debts you owe on the mortgage balance. Sometimes, homeowners ask for deeds in lieu of foreclosure if their mortgages are underwater (i.e., they owe more money on the mortgage than the home is worth).

Note, of course, that a deed in lieu of foreclosure is often a last resort to escape financial hardship. Understanding how it works and how a deed in lieu affects your credit and legal documents is crucial to using this wisely in your dealings with mortgage companies.

Generally, deeds in lieu of foreclosure are only acceptable when you’re involved in a traditional Fannie Mae or Freddie Mac home loan. However, some deeds may be accepted for homes purchased through loans from the US Department of Housing and Urban Development (HUD). 

Why Do Lenders Accept Deeds in Lieu?

A lender might accept a deed in lieu of foreclosure for two primary reasons:

  • They get faster control of the property. In most cases, accepting a deed in lieu of foreclosure is quicker and cheaper than going forward with the foreclosure process, especially when considering fees and court timetables.
  • The property is in good condition, and the lender is interested in taking control to sell it for more money and have it on the market for less time. In these instances, a lender may only accept a deed in lieu of foreclosure if you keep the property in good condition.

With a deed in lieu of foreclosure, you still have to leave the property (in most cases). However, a deed in lieu of foreclosure is a mutual, amicable understanding that the homeowner can’t make mortgage loan payments. 

The lender does not force the homeowner into foreclosure, minimizing any possible credit and financial record harm.

What Are the Benefits of a Deed in Lieu of Foreclosure?

Homeowners sometimes seek out deeds in lieu of foreclosure due to several key benefits, namely:

  • The hit to the credit score is much less severe. A deed in lieu agreement remains on your credit report for four years, but foreclosures stay on your credit report for seven years (so it’s easier to buy a new home later).
  • Lenders often provide relocation assistance for moving out, as they want to take possession of the property quickly and while it is in top condition.
  • Deed in lieu of foreclosure minimizes your deficiency or the negative difference between what your home is worth and what you owe on it. This means you don’t have to pay your lender more money after moving out.

What Are the Downsides to Deeds in Lieu of Foreclosure?

A deed in lieu of foreclosure can result in several downsides, such as:

  • You lose all control of the home, and your name is removed from the title.
  • There’s no guarantee that a lender will accept a deed in lieu of foreclosure.
  • Your credit score still takes a significant hit, and you won’t be able to get a mortgage quickly for several years.
  • If your lender forgives more than $600 in terms of deficiency on your loan, the IRS will consider that income so that you could owe additional money in tax consequences and tax liability at the end of the fiscal year.
  • You’ll have to leave your home once you trade the deed.

Should You Use a Deed in Lieu of Foreclosure?

Given all these elements, you might wonder whether a deed in lieu of foreclosure is a wise idea if you want to avoid foreclosure entirely.

If there’s no other option, a deed in lieu is still superior to a foreclosure. Your financial record will take less of a hit, and your dreams of future homeownership will likely be less compromised. A deed in lieu of foreclosure can help you escape your current property and find a new one with a better financial situation.

That said, a deed in lieu of foreclosure comes with several negative strings attached, making other foreclosure avoidance alternatives more attractive. 

Tapping into Home Equity With Balance 

While a deed in lieu may be an alternative to a foreclosure, you are not guaranteed to be offered a deed in lieu, your credit will be negatively impacted, your future options will be impacted, and you will still need to surrender your home.

Balance Homes has created an alternative option to help homeowners keep and stay in their homes while also getting the funds they need to improve their finances. If approved for Balance's homeownership program, your mortgage loan will be replaced with an equity investment. Your mortgage would be paid off, and you'll make a monthly payment to Balance that covers your occupancy of the home and your share of the insurance and taxes. 

Balance provides flexibility and gives homeowners the chance to repair their homes, consolidate debt, catch up, and build both their credit and financial profiles. This gives homeowners the opportunity to refinance in the future and regain full ownership of the property. 

If approved for a co-investment with Balance, you’ll be a co-owner of your home since you remain on title and hold the sole right to live in the property. It’s shared ownership, not shared space — you get all the privacy and benefits of living in your own home. 

If you're looking for a way to avoid foreclosure, or stop falling further behind, and want to continue owning in and staying in your home, and get the cash you need to improve your finances contact Balance.

Contact Balance Today

There’s no reason to give up total ownership of your property. A deed in lieu of foreclosure isn’t your only alternative to foreclosure. 

Instead, contact Balance. If you’re approved, you can stay in your home while alleviating your current mortgage's financial pressure.


Deed in Lieu of Foreclosure: Meaning and FAQs | Investopedia

What is a deed-in-lieu of foreclosure? | Consumer Financial Protection Bureau

Which Is Worse for My Credit Score: Bankruptcy or a Deed in Lieu of Foreclosure? | Nolo

Foreclosure: Definition, Process, Downside, and Ways To Avoid | Investopedia