RealtyTrac logo
For SaleForeclosurePre-ForeclosuresBank OwnedAuctionsRecently SoldGuides & StrategiesKnowledge BaseGlossaryCalculatorsMarket Info
Foreclosure processPre-foreclosure

Deed in Lieu of Foreclosure

Also called Deed in lieu, DIL

In short

A deed in lieu of foreclosure is an agreement in which a borrower voluntarily transfers ownership of a home to the lender to settle the mortgage and avoid the foreclosure process.

Who initiates it
Borrower requests, lender approves
Requirement
Usually no other liens on title
Outcome
Lender takes title, property becomes REO
Credit impact
Negative, but often less than foreclosure

Where it fits in a foreclosure

Deed in Lieu of Foreclosure belongs to the pre-foreclosure stage.

  1. 1Missed paymentsThe owner falls behind; the servicer sends notices and may offer workout options.
  2. 2Pre-foreclosureA notice of default or lis pendens is filed. The owner can still sell, catch up or negotiate.You are here
  3. 3AuctionThe property goes to a public sale, usually for cash, as-is and often without an inspection.
  4. 4Bank-owned (REO)If no one outbids the lender, it takes the property back, clears most title issues and lists it.
  5. 5ResaleA buyer or investor purchases, repairs and occupies, rents or resells the home.

How a deed in lieu works

The owner applies to the lender, usually after trying to sell the home. If the lender agrees, the owner signs a deed transferring the property to the lender, and the lender releases the mortgage. The owner moves out by an agreed date, and the home becomes bank-owned.

When lenders accept one

Lenders generally require a clean title. If there is a second mortgage, a tax lien or a judgment lien, the lender would take the property subject to those claims, so it may refuse or require that they be resolved. Many lenders also want proof the home was marketed for sale first.

Considerations for the owner

  • The agreement should state whether the lender waives any remaining balance, or whether a deficiency can still be pursued.
  • Some programs offer relocation assistance, similar to cash for keys.
  • Forgiven debt may have tax consequences.

Rules and lender programs vary, so owners should consult an attorney or HUD-approved housing counselor.

Example

A deed in lieu with relocation help

An owner owes $205,000 on a home worth $185,000, with no second mortgage. After listing it for three months without a viable offer, the owner applies for a deed in lieu. The lender approves, waives the $20,000 shortfall in writing and pays $3,000 in relocation assistance. The owner signs the deed, leaves the home broom-clean, and the lender later sells it as an REO.

Deed in Lieu of Foreclosure vs. Short Sale

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is an agreement in which a borrower voluntarily transfers ownership of a home to the lender to settle the mortgage and avoid the foreclosure process.

Short Sale

A short sale is the sale of a home for less than the amount owed on its mortgage, with the lender's approval. The lender agrees to accept the reduced proceeds to avoid a foreclosure.

The differenceIn a short sale the owner sells the home to a third party for less than owed. In a deed in lieu the owner gives the home directly to the lender.

Frequently Asked Questions

Related terms

REO / Bank-Owned PropertyForeclosure processAn REO (real estate owned) or bank-owned property is a home a lender took back after it failed to sell at foreclosure auction. The lender then sells it, usually through a real estate agent.Deficiency JudgmentForeclosure processA deficiency judgment is a court ruling that makes a borrower personally liable for the remaining mortgage debt when a foreclosure sale brings in less than the amount owed.ForeclosureForeclosure processForeclosure is the legal process a lender uses to take back and sell a property after the borrower stops making mortgage payments, so the lender can recover what it is owed.Pre-ForeclosureForeclosure processPre-foreclosure is the period after a lender files a default notice or foreclosure lawsuit but before the property is sold at auction. The owner still holds title and can sell or catch up.Cash for KeysForeclosure processCash for keys is a payment a lender or new owner offers to occupants of a foreclosed property in exchange for moving out by a set date and leaving the home in agreed condition, avoiding eviction.Loan ModificationForeclosure processA loan modification is a permanent change to a mortgage's terms, such as a lower rate, longer term or added past-due amounts, that a lender agrees to so a struggling borrower can afford payments.ForbearanceForeclosure processForbearance is a temporary agreement in which a mortgage servicer lets a borrower pause or reduce payments during a hardship. The skipped amounts must be repaid or resolved later.LienTitle & legalA lien is a legal claim against a property that secures a debt. It must usually be paid off before the property can be sold with clear title, and the creditor can force a sale in some cases.

Learn more in the knowledge base

What Is a Pre-Foreclosure? How the Stage Works for BuyersGuide · 7 min readPre-foreclosure is the window between a lender starting foreclosure and the home being sold at auction. The owner still holds title and still has options, so any purchase is a negotiation with the owner rather than a bid or a bank sale. This guide explains how the stage starts, how it ends and how it compares with auctions and bank-owned homes.What Is a Bank-Owned (REO) Property? A Buyer's OverviewGuide · 6 min readA bank-owned, or REO, property is a home the lender took back after a foreclosure auction failed to attract a high enough bid. Lenders usually clear title and list these homes through agents, which makes them the most accessible type of distressed property for most buyers. They are sold as-is, though, and often need work.Title, Liens and Due Diligence on Distressed PropertiesGuide · 9 min readDistressed properties often come with debts and paperwork problems attached. A title search, a clear understanding of which liens survive a sale and the right title insurance protect you from inheriting someone else's obligations. This guide explains what to check and when.
ABCDEFHJLMNOPQRSTZ

Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.