Definition
A deed in lieu of foreclosure is a signed document in which an owner relinquishes all ownership interests in property in order to avoid foreclosure.
Analysis
A deed in lieu of foreclosure is sometimes referred to as the real estate equivalent of a voluntary repossession. If a homeowner is facing foreclosure, they may voluntary turn over the property in order to reduce the costs a lender normally incurs through the foreclosure process.
Those costs can include substantial legal fees, filing fees and other related charges. All of these costs are included in the loan balance. Even if the property is auctioned, the homeowner would still be responsible for any deficiency balance.
Lenders typically do not agree to this transfer if the homeowner owes more than the fair market value of the property. However, a lender may agree to a short sale as an alternative to accepting a deed in lieu of foreclosure.
