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Deed in Lieu Explained

A deed in lieu of foreclosure offers a borrower in financial distress the opportunity to avoid foreclosure by voluntarily transferring the deed (and therefore full ownership) of a property to the lender.  In return for the deed to the property, the borrower is able to be released from most or all of the debt from the defaulted loan, is able to negotiate a move-out date with the lender, and does not have to worry about selling the property. 

Accepting the deed in lieu of foreclosure offers the same sort of protection as a short sale.  In both cases the borrower would be able to avoid the mark of “foreclosure” from appearing on their credit score and in both cases the borrower has made peace with the fact that they will have to move from the property.  A short sale is different; however, from a deed in lieu arrangement because a short sale would require that the borrower find a buyer for the property, but a deed in lieu arrangement would place the burden of finding a buyer on the lender.  This usually does not bother the lender because they have more resources to ensure they can get a price they agree to.

The only downfall a lender faces with a deed in lieu of arrangement is that they will be responsible for the property until it sells.  This means that they must make sure the lawn stays cut and rodents don’t take up residence in the vacant home.  With this knowledge in mind many borrowers may be able to negotiate an arrangement with the lender to that would allow them to pay rent to stay in the property for a few months at a time.  Depending on how soon a lender thinks they will be able to flip the property will determine how long they would be willing to allow the borrower to stay in the residence.  The longer a lender can keep a home occupied the longer they will have to go without outsourcing the maintenance of the property to a third party.  This is especially true of large areas of land that would require more attention than an absentee owner could offer. 

If a borrower is able to negotiate a fair move out date with their lender then they may be able to stay in the property up to a month or two rent and payment free.  Anything beyond this would most likely require some sort of rental agreement with the lender.

Deed in lieu of foreclosure is only one option of many that exist for the homeowner facing financial hardship.  Different options will have different effects on different people, since everyone’s situation is unique.  What seems like the best option for one person may not always be the best option for all.  Discussing options to avoid foreclosure with an experienced real estate / financial attorney will help the borrower get a grasp of their current situation so that they may act with the most information possible.  An attorney can be used in the pre-foreclosure process to negotiate on behalf of the borrower and to explain the piles of paperwork that come from such a legally delicate transaction.  If the borrower is not careful they may be rushed into a contract or arrangement that offers little long term relief.