A deed-in-lieu of foreclosure is really just the technical, legal name of a certain type of deed, like a “quitclaim deed” or a “gift deed.” Even though it is a term for a deed, it is also a phrase used by lenders and attorneys as slang for the process by which the lender/bank accepts a deed back for the property from the homeowner rather than taking title to the home through a full foreclosure process.

There are no specific criteria for qualification for a DIL. Each lender makes its own determination of whether a DIL would be appropriate. Generally, however, the lender will review:

1. The value of the property;
2. Your ability to repay the outstanding debt;
3. The reason for your financial hardship;
4. The costs and time it will take to foreclose

You will have to provide financial information to the lender and request a DIL. If the lender determines you have no realistic chance of getting back on track, and the time and expense of foreclosure is too long for the lender, they will probably accept a DIL.

You must demonstrate your hardship in a letter to your lender that outlines the set of circumstances causing the hardship. Generally, lenders consider divorce/separation, loss of income, death of spouse, illness, job relocation or military service to be acceptable reasons to consider a DIL. A compelling hardship letter included in your application is a very important part of a successful DIL.

The DIL process is very similar to that of a loan modification or short sale; however, many lenders require the property to be listed for 90 days prior to considering a DIL. The property must be listed at fair market value and the seller must make reasonable efforts to sell the property. The lender would prefer that you sell the property because it is not in the business of owning and managing real estate.

If the property doesn’t sell, the lender will then evaluate your overall financial health to assure itself that you do not have the ability to repay the loan. First, you will need to supply the lender with evidence of your income which can be demonstrated by such items as a paystub or a pension distribution check. Second, you will need to complete a personal financial statement disclosing your expenses in detail (PFS). Third, you will need to demonstrate a financial hardship. Fourth, the lender will review the information provided to determine if you fit into a DIL program.

If you do qualify, the lender will complete a title search of the property to make sure the lender can obtain marketable title to the property, free from all other liens and encumbrances. If the title work is clear, the lender will forward appropriate DIL documentation to you and your attorney for completion. One of those documents will be an actual deed that will convey the property back to the lender.

It does not matter! The lender understands one of the reasons you are deeding the property back is because there is no equity and, therefore, no chance of selling it to anyone else despite your best efforts.

A deed-in-lieu usually only works when there is only one mortgage on the property. If you have a first and second mortgage (or any other liens, such as a HELOC, or a tax lien or judgment) on the property, it is possible to complete a deed-in-lieu, but it is extremely difficult and requires the first and second lien holders to work together. Expert help is usually required to negotiate a complex situation such as this.

Although banks are often difficult to negotiate with in a default/foreclosure situation, with proper backup documentation many lenders are willing to admit when “they’re beat.” If serves the lender no purpose to pursue, sue and otherwise harass a borrower in dire financial condition with no hope of repaying the loan. In that instance, the bank recognizes its better to save the time and expense of a foreclosure process and accept a deed directly back from the borrower. In fact, lenders even recognize its better sometimes to give homeowners some money to walk away from the home rather than put up a long, nasty fight to foreclose.

There could be significant tax or financial problems if you don’t properly negotiate a DIL. For instance, you could end up owing income tax on forgiven debt, or you could end up having to sign a promissory note to the lender to pay extra money, even after you give the house back. It is important that you seek advice from an attorney and tax professional before signing any DIL with the lender.

As an incentive to induce borrowers to offer a deed-in-lieu back to the lender, lenders are sometimes willing to pay a relocation fee to the borrower at the time of settlement, usually referred to as “cash for keys.” This relocation fee is designed to help you with fees associated with moving and is contingent upon you taking care of the property until the keys are turned over to the lender.

Maybe. Lenders may not accept a DIL application close to the time of foreclosure since all the foreclosure expenses have already been incurred by the lender, but some lenders will stop the foreclosure auction if you initiate a DIL in good faith. If you are close to an auction date, it is imperative to contact an attorney right away to determine what options are available to you to stop the auction on an emergency basis.

Technically, offering a DIL is better than going through a full foreclosure, as you are voluntarily returning the asset to the lender. However, even though it may not do the same amount of damage that a full foreclosure would, a DIL will still result in the loan default being entered on your credit record, and could stay on your credit file for at least 7 years.

Yes. You can be late, in default, in bankruptcy, or in foreclosure at the time the application for the DIL is made.

Because of the severe tax, credit and financial implications related to a DIL, it is imperative that you retain professionals who understand the deed-in-lieu process and can advise you of any pitfalls in the process.

To help our clients be better informed, The SOS Law Group provides a 1 hour free consultation for the purpose of discussing all of your loss mitigation options.

You can get the help you need to apply for a DIL with your lender through The SOS Law Group. We will take you step-by-step through the DIL process, from helping you write your hardship letter to negotiating the terms of your DIL.