Deed in Lieu

• A deed in lieu is a relatively simple process, whereby the homeowner agrees to sign the ownership of his house to the lender. Essentially, the lender gets the property and forgives the mortgage. This avoids the entire foreclosure process. The homeowner still has to leave the house, but has more control over the time and method, so a deed in lieu may be an attractive alternative for borrowers that do not want to be face an eviction.
  
  Lenders have a number of requirements for a deed in lieu of foreclosure. If there is a second mortgage on the property, it is very unlikely that the lender of the primary mortgage will agree to a deed in lieu. The holder of the second mortgage can rarely use a deed in lieu at all, and the primary lender may require a clause that stops the second lender from taking legal action on the second mortgage if a deed lieu grants the house to the primary lender. In either case, lenders will only accept a deed in lieu if they can redeem the worth of the loan from the value of the house.
  
  

Credit

• Both a deed in lieu and a foreclosure can have adverse credit effects. They have similar consequences, because both result from a defaulted mortgage, even if it is a second mortgage. Accordingly, they affect credit scores in the same way. In some cases, a lender may review a credit report and be more impressed with a deed in lieu, because it shows a willingness to work out problems. However, basic credit issues remain the same. Both will last around seven years before removal from credit reports.
  
  

Debt Requirements

• Borrowers should keep in mind that a second mortgage is smaller than initial home loans; in a foreclosure, it is almost a guarantee that the mortgage will be fully paid off. In some cases, a foreclosure can still leave liens on the property, which are claims for debt repayment for a variety of activities, including construction work and property taxes. With a deed in lieu, the lender assumes responsibility for these liens and the borrower does not have to worry about them. In a foreclosure, however, some liens may remain with the borrower and create future difficulties.For this reason, a primary lender is often unwilling to accept a deed in lieu with another lien on the property, including a second mortgage, a line of credit or a property tax lien.
  
  

Deed in Lieu Benefits to Lender

• From the perspective of a lender, a deed in lieu may be better than a foreclosure in the absence of many additional debts. A foreclosure is time consuming and requires an investment from the lender to complete. These costs in addition to the typical drop in home value can lead to lender losses. A deed in lieu is a faster option that can often save lenders money, so it may be a more attractive option from their point of view.
  
  If a lender holds both the primary and second mortgage--a common occurrence--then the lender will base decisions on the value of the home. If the value is high enough that the lender will be paid for both mortgages, a deed in lieu may be possible. If the value is not high enough to cover the second mortgage, the lender will choose to foreclose rather than accept a deed in lieu of foreclosure.