Deed-in-Lieu of Foreclosure
by Lisa Phillips
December 2009
How the Deed-in-Lieu Works

The lender will have you sign legal documents such as a Quit Claim
Deed, Grant Deed, Agreement in Lieu of Foreclosure and Warranty.
These documents are usually signed by the lender and homeowner
and convey legal ownership of the property back to the lender.

You have to pay attention to the paperwork your lender gives you
during this process. The lender may try to get you to sign a promissory
note which would be your promise to pay the lender some amount of
money towards the loss the lender is taking by doing a deed-in-lieu of
foreclosure.

To avoid this, the homeowner should get a document such as the
original note marked as “paid.” The lender should also provide the
homeowner with documentation showing the debt has been canceled
and documentation showing the lender has waived their rights to a
deficiency judgment.

A deficiency judgment would give the lender the right to request any
unpaid debt not recovered by a sale of the property. All paperwork and
documentation should reflect the homeowner (borrower) is totally
released from the liability of the mortgage payments.

The Mortgage Forgiveness Debt Relief Act of 2007 excludes the
forgiven debt so you will not have to pay taxes on the canceled debt.
The homeowner should contact the IRS for information on reporting
the cancelled debt on federal tax returns because certain conditions
must be met to qualify.
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As a last resort, you may be
able to voluntarily "give back"
your property to the lender.
You will not be able to stay in
your home. A deed-in-lieu of
foreclosure is not as
damaging to your credit rating
as a foreclosure; however, it
will be a negative mark on
your credit history. This option
is only available if there are
no other liens or judgments
on the property.
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