If you’re struggling to pay your mortgage, this option could be better than foreclosure


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Homeowners who don’t pay their mortgage will face foreclosure — the process by which the mortgage lender seizes the property. Homeowners may even be unceremoniously evicted. One alternative to foreclosure is a deed-in-lieu agreement. In this type of transaction, the homeowner willingly gives up ownership of the property and signs the deed of trust over to the mortgage lender, typically in exchange for release from their mortgage debt. With a deed in lieu of foreclosure, you can negotiate with the lender to forgive the mortgage loan balance and avoid owing money in the future from a deficiency judgment.

A deed in lieu of foreclosure can be a good idea for homeowners who want to gracefully leave their home and avoid the more public foreclosure process. While a deed-in-lieu will adversely affect your credit, the damage won’t be as severe as that from a foreclosure.

It is not guaranteed that the lender will accept the deed in lieu of foreclosure. If you’re considering this foreclosure alternative, you’ll need to know how a deed-in-lieu works and how to approach the mortgage company. We’ll talk about the steps needed to get a deed in lieu of foreclosure and when it’s a good idea.

How do I get a deed in lieu of foreclosure?

If you can’t make your mortgage payments and don’t think you’ll be able to do so in the future, the first step is always to let your loan servicer know as soon as possible.


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Borrowers who are considering a deed in lieu of foreclosure can actually approach their lender before they’ve missed any payments. They will have to fill out a loss mitigation application to the bank and provide proof of their financial hardship.

The lender may also be hesitant to offer a deed in lieu of foreclosure if there are judgements or liens on the property, including a tax lien for unpaid property taxes, or a “junior lien” on an outstanding HELOC or home equity loan. Owning a property with these encumbrances, or with a clouded title, can be burdensome for the lender. It might be easier for them to foreclose on the property, since foreclosure would erase some of the liens.

The lender is not obligated to grant you a deed in lieu of foreclosure. The borrower might first try to list the property with a real estate agent to see if they can sell the home first to repay the debt. Selling your home may be the safest way to get out of a loan you can’t afford because it has no negative consequences for your credit.

Learn more about paying your mortgage during the coronavirus pandemic.

Negotiate the terms to settle your debt

The most important part about a deed in lieu of foreclosure is coming to an agreement with the lender regarding your liability, or what you’ll owe them. A deed-in-lieu of foreclosure is ultimately settling your debt for less than what you originally owed.

When you get a deed in lieu of foreclosure, your mortgage debt doesn’t automatically go away. In many states, the lender can still come after you for the deficiency — the difference between the appraised value of the home and your mortgage balance. If you haven’t kept up with your payments for some time and the market value of your home has plummeted, you could owe the lender a lot of money. The deficiency amount may even accrue interest.

That’s why it’s key to negotiate and avoid a deficiency judgment. If you don’t properly negotiate the reduction or forgiveness of your mortgage debt, then a deed in lieu of foreclosure won’t be as useful, since you’ll still owe money. It might be helpful to use a real estate or foreclosure attorney or a HUD-approved housing counselor. In any case, make sure you get the lender’s agreement in writing as proof.

You may also try to work out a cash-for-keys agreement, where the mortgage lender gives you a sum of cash for relocation assistance. They may even allow you to remain on the mortgage property for a few more weeks. (Fannie Mae’s mortgage release program even offers to let the homeowner lease the property for a period of time.)

Cash-for-keys and deed-in-lieu transactions can also benefit the mortgage company, since they are reassured that the homeowner will vacate the property in good condition and in a timely manner.

Is a deed in lieu of foreclosure a good option?

Relinquishing ownership of your home is never ideal, but it can be better than foreclosure. Here are some reasons a borrower may consider a deed in lieu of foreclosure:

Avoid publicity

Depending on your state, the lender may have to file a lawsuit against you. You can avoid litigation and public notice of a foreclosure sale with a deed-in-lieu, which primarily takes place behind the scenes between the borrower and the lender. You also won’t have to worry about being evicted or forcibly removed from your home when you choose to leave voluntarily with a deed in lieu of foreclosure.

Your credit will take less of a hit

When a lender pulls your credit report, they will see that your debt has been settled with a deed-in-lieu, which does not carry the same weight as the derogatory mark of foreclosure. However, your credit score will still be heavily impacted by a deed in lieu.

You must typically wait seven years after foreclosure to qualify for a new loan, but with a deed-in-lieu, you may qualify sooner, in as little as three years. We do not recommend taking on more debt until you’re completely sure that you can pay it back.


If your mortgage debt was forgiven by your lender, there may be tax consequences. The IRS views forgiven debt as taxable income, so you’ll need to report it on your tax return.

(Between 2007 and 2017, borrowers who had their mortgage debt forgiven or who were foreclosed on could exclude their mortgage debt from their taxable income, thanks to the Mortgage Debt Relief Act.)

Alternatives to deed in lieu of foreclosure

In addition to a deed-in-lieu transaction, there are other foreclosure alternatives that a homeowner can consider. If you want to remain in the home, you should talk to your mortgage lender about loan modification. Depending on your circumstances, and if your inability to pay is only temporary, the lender may offer you forbearance. Declaring Chapter 13 bankruptcy would put you on a reduced payment plan and also allow you to keep your home. Learn more about getting a mortgage after bankruptcy.

Sometimes when you’re facing foreclosure it’s best to just sell the home. If it hasn’t lost too much value, selling the home can help you repay most or all of your mortgage debt.

If you aren’t delinquent on your mortgage yet, you might consider a refinancing to lower your payments. Refinancing means taking out a whole new loan to pay off the current mortgage, so you will only qualify if your financial situation is solid.

This article originally appeared on Policygenius and was syndicated by MediaFeed.org.

Featured Image Credit: fizkes/iStock.