A Deed-in-lieu of Foreclosure is basically giving the house back to the lender. In most cases this will only work if the borrower does not have a second loan on the property. The reason is, you can only give the property to one lien holder and the other lender would not agree to release the lien unless they were to receive some sort of compensation.
There are some advantages for both the lender and the borrower and well as some disadvantages. The benefits to the borrower are you can escape the public notoriety and embarrassment of a foreclosure. In most cases it will release you of the debt from your loan. The benefits to the lender are they get the house back quicker and cheaper than if they were to foreclose.
There are several considerations the lender will go through to determine whether or not they will be willing to take the property back. One is the value of your property. They are going to get an appraisal or a Broker Price Opinion (BPO) to determine the value of the property. If the lender feels that they can sell the home for what you owe then they will consider taking it back. However if the lender is feels the value of the property is less than what they can sell it for then they may ask the borrower to sign a promissory note. Typically there will be no interest on the note and the payments are very low.
Another consideration is how far in default the borrower is. If they have filed a notice of default and they are within 90 days of the scheduled sale date then they are less likely to take the house back. The deed-in-lieu process can take 4-6 weeks for them to approve, at this point they will have incurred legal fees to foreclose and they will be close enough to the sale date so they might as well sell it at auction.
The lender is also going to look at how many non performing loans & REO properties (real estate owned) they have on their books. If the lender is already overloaded with REO properties then they will be less likely to agree to take the property back. In cases like this the lender will encourage the borrower to sell the property either through a short sale or full payoff.
A deed-in-lieu foreclosure is still going to negatively affect the borrower’s credit, but it will be less damaging than a foreclosure, especially if they were not behind on their payments. It could also prevent any further collection attempts from the lender.
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