With a deed in lieu of foreclosure, you give your home to the lender (the “deed”) in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Be sure that the lender agrees, in writing, to forgive any deficiency (the amount of the loan that isn’t covered by the sale proceeds) that remains after the house is sold.
Benefits to a deed in lieu. Many believe that a deed in lieu of foreclosure looks better on your credit report than does a foreclosure or bankruptcy. You simply hand over title and let the lender sell the house.
Disadvantages to a deed in lieu. There are several downfalls to a deed in lieu. As with short sales, you probably cannot get a deed in lieu if you have second or third mortgages, home equity loans, or tax liens against your property.
In addition, getting a lender to accept a deed in lieu of foreclosure is difficult these days. Many lenders want cash, not real estate — especially if they own hundreds of other foreclosed properties. On the other hand, the bank might think it better to accept a deed in lieu rather than incur foreclosure expenses.