What Is A Deed In Lieu Of Foreclosure?

This is a term that you hear a lot or you may hear a lot but often times, people don’t know what it really means. It’s where you sign over the deed or title to a piece of real estate, usually a home that you’ve fallen behind on the payments. You sign that property over to the lender instead of the lender having to go through the trouble of actually foreclosing in a formal way to take title to the property. So you think it would be common when borrowers can’t make payments or decided to move on that lenders would openly accept a deed in lieu of foreclosure. The problem though is whatever form of title or clouded title you may have, you are now passing on to the lender.

As an example to that, if you as the borrower had other liens attached to the property like second mortgages or tax liens or judgement liens or anything like that, those liens stay attached to the property. The lender that you are signing the title over to gets title subject to all those liens and junior mortgages and that’s not what they want. Lenders on a first mortgage want a clean title. They don’t want any other liens on title so they can go resell it and hopefully make some money in the process or at least recover as much of their loos from the collateral as they can. So, a deed in lieu of foreclosure, although it makes perfect sense in theory, in practice, it’s actually very rare and most lenders will not take a deed in lieu of foreclosure and most borrowers or homeowners don’t understand why.

They think, “Hey, I’m willing to sign it over. Why bother with foreclosure? Why put both of us through that process if I’m telling you don’t worry about it. I’ll give you the title.” That’s a little bit of insight into why a deed in lieu of foreclosure is not very common and why lenders, even when the borrower is offering a deed in lieu of foreclosure or they would be fine with it, lenders tend to go foreclose anyway. It’s because when they foreclose, they get clean title. They get a trustee’s deed upon sale which clears title of anything else that may be on title to that property. This is all true in California. I’m a licensed practicing attorney in California but I don’t know how it works in other states. I assume it works similarly but this information mainly applies to California law and California foreclosures.

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