What Is a Deed in Lieu of Foreclosure?

Definition and examples of a deed in lieu of foreclosure


A deed in lieu of foreclosure is a document that transfers a home's title from the homeowner to the bank that holds the mortgage.

Distressed couple reviews their finances on the sofa with paperwork

Fertnig / Getty Images


A deed in lieu of foreclosure, sometimes referred to as simply a "deed in lieu," transfers a home's title from the owner to the bank that holds the mortgage. The action is taken in lieu of having the lender foreclose on the property.

The arrangement can free you from financial liability in a way that can be a bit less damaging than a foreclosure if you've fallen behind with your mortgage and have no way of catching up and otherwise rectifying the situation.

Definition and Example of a Deed in Lieu of Foreclosure

Homeowners who find themselves with mortgage payments that they can no longer afford are not always able to sell their homes for enough money to cover the balance they still owe. One solution is to sign the home over to the lender if it is willing to agree to such an arrangement. This process is referred to as a "deed in lieu of foreclosure." The lender accepts the deed, transferring ownership of the property rather than going through the time and expense of a foreclosure process.

People often make this choice after the bank has either denied a loan modification or a short sale offer. It can often be a better option for owners than waiting for the bank to foreclose.

How a Deed in Lieu of Foreclosure Works

Banks sometimes offer homeowners the option of a deed in lieu rather than approving a short sale. It can be less expensive and a faster option than foreclosure for lenders. Foreclosure means going through a court process in many states.

A short sale involves selling the property for less money than what is still owed on the mortgage. Sellers can get out from under a mortgage that way if the lender allows the sale and agrees to waive the deficiency.


Always seek professional advice before agreeing to a deed in lieu. You can contact the Consumer Financial Protection Bureau at (855) 411-CFPB to be connected with a counselor who's approved by the U.S. Housing and Urban Development.

Homeowners in distress can reach out to their lenders to find out whether a deed in lieu is an option. It involves submitting an application, along with proof of your financial situation. Each lender's rules for the process can vary. Some lenders might require that a home be listed for sale first so there's a chance for a short sale before they accept a deed in lieu.

Each party must sign the title-transferring document when both parties agree to the deed in lieu. It must be notarized. It becomes part of the public record, just like other property transfers.

What a Deed in Lieu Means for the Bank

Encumbrances, judgments, or tax liens that have been filed against a home can prevent a deed in lieu. These actions remain attached to the property if they're not released prior to the agreement for a deed in lieu. They would become the lender's responsibility after the transfer. Banks are more likely to accept a deed in lieu on a property that has only the original loan against it.


Foreclosure eliminates junior liens, so this is often an easier solution for lenders when any are in place. Junior liens are those that are recorded after the first mortgage.

It's also possible that an existing pooling and servicing agreement (PSA) might ask the borrower to make a financial contribution in exchange for acceptance of a deed in lieu. A PSA is a contract in place when a mortgage-backed security is the owner of the mortgage.

Borrowers who are unable or unwilling to meet this demand will often be refused a request for a deed in lieu.

Pros and Cons of a Deed in Lieu of Foreclosure

  • Debt can be eliminated without foreclosure.

  • Lenders may offer money to assist with moving.

  • A deed in lieu damages your credit.

  • Getting another mortgage will be hard.

Pros Explained

  • Debt can be eliminated without foreclosure. Make sure that the deed in lieu releases you from any liability to repay all loans against the property. There's little point in handing over title if you'll be pursued for a deficiency balance, but this is often negotiable. Get any waiver in writing.
  • Lenders may offer money to assist with moving. They may agree to a "cash for keys" deal, which would provide you with money to assist with moving expenses in exchange for handing over the property quickly and in good condition.

Cons Explained

  • A deed in lieu will damage your credit. It will show up on your credit report even if the effect is often less than the hit you would take for a foreclosure.
  • Getting another mortgage will be hard for a while. Fannie Mae and Freddie Mac won't buy a mortgage in the secondary market when it's made by a borrower who signed a deed in lieu in the last four years without extenuating circumstances, such as divorce, a death in the family, or serious illness. It drops to two years if any of these events was the reason you had to give up your home.

Do I Need to Pay Taxes on Canceled Debt?

Ask your accountant whether the canceled debt from your home loan could result in a tax liability. It may be taxable, but you may be exempt, again depending on the circumstances.

Key Takeaways

  • Deeds in lieu of foreclosure can help lessen the negative impact of losing one's home.
  • Lenders sometimes prefer deeds in lieu. They can be a less costly process than a foreclosure.
  • Make sure the lender agrees to waive your financial obligation in exchange for signing the deed.
  • Consult a tax professional to determine whether your canceled debt is taxable.
Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Consumer Financial Protection Bureau. "What Is a Deed-in-Lieu of Foreclosure?"

  2. Consumer Financial Protection Bureau. "How Does Foreclosure Work?"

  3. Consumer Financial Protection Bureau. "What Is A Short Sale?"

  4. Homeownership.org. "Deed-in-Lieu of Foreclosure."

  5. Fannie Mae. "Selling Guide."

  6. Internal Revenue Service. "Real Estate Property Foreclosure and Cancellation of Debt Audit Technique Guide," Page 6.

Related Articles