A deed in lieu of foreclosure is going to vary somewhat depending on your state and depending on who your loan is through. In some cases, there are specific programs and guidelines in place designed to streamline the process of a deed in lieu of foreclosure. In any case, the key is that both the homeowner and the lender agree that a deed in lieu of foreclosure is the best option and that they work out an agreement together that the homeowner enters into on a voluntary basis.
Understanding Deed in Lieu of Foreclosure
The deed in lieu of foreclosure process is, in general, a process whereby a homeowner gives up all legal rights to the home in exchange for being absolved of all obligations associated with it. In other words, a lender agrees to essentially take back the home. The mortgage goes away, and the lender gets the house back without having to foreclose. This is far more advantageous to the homeowner than going through the entire foreclosure process, since less damage is done to the homeowner's credit score.
There is also the opportunity to negotiate what will happen if there is a deficit between what the home is worth and what is owed on it. If a lender forecloses and state law allows, the lender can normally come after (sue) the debtor for the deficit balance that isn't recovered in foreclosure. When a deed in lieu of foreclosure option is chosen, because it is voluntary and involves agreement between lender and homeowner, it is possible to negotiate a deal in which the lender agrees not to pursue a deficiency judgment or the borrower agrees to repay the deficit over time.
Finally, in some cases, there is another significant benefit for borrowers: they get to receive relocation money. This is an option with Fannie Mae loans, with VA loans (up to $1500 can be paid) and even in some cases with conventional mortgages when the right criteria is met. The opportunity to receive relocation money is an incentive to borrowers to actively pursue alternatives to foreclosure.
