Deed in Lieu of Foreclosure is an alternative solution to the default process of a full foreclosure. The deed grants the lender full rights to the property title. Although your credit does not go unchecked, it certainly is better than a full foreclosure on your credit.
This is a quicker less painful way to go. Deed in Lieu of Foreclosure is a cheaper way for the bank since the foreclosure process is long and costly. In order to qualify for a Deed in Lieu of Foreclosure, the property must have a market value less than the outstanding debt and must be clear of any 3rd party creditors or liens. Sometimes the mortgage company will not agree if what is owed exceeds the value of the property.
However, since that is the case with all of the foreclosed homes for sale right now…what is owed on the property far exceeds what the value of the property is, the bank may decide that they will accept a Deed in Lieu of Foreclosure which will same them money in the long run.
It is important that if this is the action that you wish to take, that you place in writing to the mortgage lender that you are asking for a Deed in Lieu of Foreclosure voluntarily. They are not allowed to ask you to do this or pressure you in any way for a Deed in Lieu of Foreclosure.
Both the homeowner and the mortgage lender must agree and sign an Agreement in Lieu of Foreclosure that outlines the terms of the deed and transfer the legal ownership of the property.
Sometimes, the homeowner will pay to reduce the debt to ensure their credit rating. The lender will classify the original loan as paid and issue a waiver to deficiency judgment.
The Lender has the right to ask for the unpaid debt amount so be sure to consult an attorney to protect yourself.