The Advantages and Disadvantages of a Deed in Lieu of Foreclosure

deed in lieu NJ


It happens to a lot of people in New Jersey these days – the high cost of living finds you over extending yourself. One minute you’re keeping your head above water with utility bills, unsecured debt, and mortgage payments.  Then something happens; an unexpected illness, a layoff, a divorce – and suddenly you’re too far gone. Once you have consulted with your accountant and an attorney specializing in credit repair you may find that your best decision is to extricate yourself from your property. One option in this scenario is a Deed in Lieu of Foreclosure (also called a mortgage release by some lenders).


Essentially, a Deed in Lieu of Foreclosure is when the borrower surrenders the property in question to the lender, and the parties execute a title-transferring document stating that the surrendered property satisfies any remaining debt on the mortgage note. This document will have to be notarized, and will eventually be recorded in much the same way as any other deed. There are advantages and disadvantages to this arrangement.



  • Borrower avoids any (perceived) public embarrassment from a full foreclosure proceeding and/or sheriff’s sale of the property.
  • Borrower may receive better terms and conditions than would have been available in a more formal foreclosure.
  • Immediately releases the borrower from responsibility of the debt of the mortgage, and any associated collection efforts such as letters, phone calls, or court proceedings (not to mention stress)!
  • Deed in Lieu has much less of a negative impact on one’s credit score than a foreclosure. (When in doubt, call one of the three major credit bureaus and ask.)
  • Reduction in time and anxiety as compared to forcing the lender to take possession of the property, or executing a short sale.
  • You are not required to find a buyer for your property; you are only required to attempt to sell the property.
  • Sometimes the lender will grant certain limited occupancy or other property rights back to the borrower, such as a lease of all or part of the property, an option to purchase later, or a right of first refusal should someone else make a reasonable offer once the Deed is executed and recorded. (Don’t expect this though. In general, lenders want the property with clear title and without any encumbrances.)



  • A Deed in Lieu does not clear second (or even third) mortgages, and therefore will not allow the lender to take clear title to the property. (These are sometimes referred to as junior liens.) And if the Deed in Lieu is accepted, the secondary lender may come after you for the deficiency.
  • The canceled debt may generate a large tax liability, depending on the amount of the mortgage that was remaining at the time.
  • Borrower loses all equity in the property. Since this is a blanket surrender, if the equity exceeds the mortgage amount owed, the borrower will not receive the difference from the lender as they would in a short sale.
  • If the property is not in good condition, the lender may not agree to a Deed in Lieu if the outstanding note exceeds the current fair market value of the property.
  • This option will not likely be offered by the lender, so the borrower must know about and actively pursue this option. The lender must be sure that a Deed in Lieu is voluntary, and so will wait for a written offer from the borrower.
  • The lender may reject an offer for a Deed in Lieu if the property has equity or the federal government is providing financial incentives to the bank to foreclose.
  • Most lenders will not allow you to buy another home immediately after you have executed a Deed in Lieu. Those lenders that buy loans in the second market (i.e. from other, smaller lenders) will not generally buy a note from a borrower who has been part of a Deed in Lieu arrangement for 4 years without extenuating circumstances – or 2 years with extenuating circumstances. Therefore, smaller lenders will be cautious about lending to you as well, even if you decide to downsize and can prove you can make the payments on your new mortgage. Always check, as these guidelines are constantly changing.


As with any property conveyance or complex debt elimination, always consult with an attorney specializing in such areas to make sure you are making the right decision for your situation. Remember that a Deed in Lieu of foreclosure is almost always in the best interest of the lender, but it may not be for the borrower. You want to make sure you are doing the right thing. Contact Veitengruber Law; we can help with the tough decisions.

Foreclosure vs Deed in Lieu: Which is Right for You?


When it comes to debt resolution, there are quite a few options, and many of them can be confusing and/or overwhelming at first. Although you have probably heard the term “deed in lieu of foreclosure” before, you may not be completely sure of what exactly it entails. Its meaning may be of particular interest to you if you are currently struggling to make ends meet, and if you have a mortgage loan.

When you begin struggling to pay your monthly bills, one of the first things you should do is take a good, hard look at your budget. Where can you make some cuts? Are there any services that you could take a step down on – at least temporarily? Once you’ve gone through your budget (including all of your income and all of your expenses for the month) with a fine-toothed comb, does it look like your financial situation will improve with small changes?

If making small changes to your monthly expenses does not pull you above water, it may be time to start looking at your bigger expenses – and your home almost always resides right at the top of that list. Making changes to your mortgage with a loan modification or mortgage refinancing may be a possible solution. These are two options that can sometimes bring your monthly mortgage payment down enough that it becomes manageable once again.

If you’ve already gone the loan modification/refinancing route only to find that you’re still fighting an uphill battle, your options become: selling your home, listing your home as a short sale, foreclosure, or applying for a deed in lieu of foreclosure.

Today, we’re going to focus on the last two: foreclosure vs deed in lieu of foreclosure.


If you’ve missed a mortgage payment, or several, your lender can foreclose on your property. Essentially, this means that they can kick you out (due to the fact that you are failing to hold up your end of the mortgage agreement) and take the house back from you. This may sound like an acceptable resolution to your problem, however, your lender can also obtain a deficiency judgement against you if they don’t make enough money re-selling the home to cover your unpaid mortgage. For example, let’s say you owe $210,000 on your home when it goes into foreclosure, but the bank is only able to sell it to someone else for $190,000. That $20,000 difference can become your responsibility. Additionally, having a foreclosure on your credit report will cause your credit score to plummet.

Deed in Lieu of Foreclosure

In plain English: ‘in lieu of’ means ‘instead of.’ Instead of your lender taking your home away from you via foreclosure, you can approach them and offer to give back the property (and the deed to same). Pros for a deed in lieu include: no embarrassing Sheriff’s Sale, and giving your lender plenty of notice that you’re having trouble paying your mortgage means that they may be more inclined to forego charging you the deficiency amount. If they do charge you, the amount you owe may be smaller, and you have the added benefit of coming to an agreement on the amount together (with the help of your attorney). The fewer surprises, the better! Although a deed in lieu will also hurt your credit score, with all of the other factors taken into consideration, it’s usually the better option.


 Image credit: Julia Manzerova

My Bank Won’t Accept a Deed in Lieu of Foreclosure


Unfortunately, banks and lenders are under no obligation to accept a deed in lieu of foreclosure application from you, or from anyone, for that matter. While it may seem like a much more attractive alternative than foreclosure for you, deeds in lieu are not popular among most lenders.

What is a deed in lieu of foreclosure?

Filing for a deed in lieu of foreclosure (also referred to as a DIL) is an option for a distressed homeowner who is either having trouble paying his monthly mortgage payment or is unable to do so at all due to a change in life circumstance. A DIL is a process in which the homeowner essentially gives his home to the bank and walks away.

Since foreclosure is such a negative event to have listed on a credit report, many people desperately try to avoid foreclosure at all costs. A foreclosure happens when the bank or lender essentially puts your home up for sale if you have not been making payments. You must vacate the home and find another place to live. Even worse news regarding foreclosure is that afterwards, the lender can still sue you for what is known as a “deficiency judgment.”

If the bank secures a deficiency judgment, the homeowner will then owe the bank the difference between what was still owed on the mortgage and what the bank was able to sell it for in a foreclosure sale. So, while you will have already lost your home and your credit score will be marred, you will also have the possibility of still owing money to the bank. All of these reasons combined are why many people are choosing to apply for a deed in lieu of foreclosure.

A deed in lieu of foreclosure (DIL) occurs when the lender agrees to accept ownership of your home without pursuing foreclosure or deficiency judgments. It is important that you get a detailed agreement in writing during your deed in lieu process, so that you are assured that there will be forgiveness of any money you may still owe on the mortgage, along with any deficiency between what is still owed and what the home eventually sells for.

Lenders are hesitant to accept deed in lieu applications. The main reason for this is that they are in the money business, not the property business. Taking care of a home that they now essentially own (via a deed in lieu of foreclosure) means there will be further costs in order to maintain the home, such as homeowners fees, taxes and general upkeep of the home’s exterior and interior until it can be sold.

In order to increase the chances of your deed in lieu application being approved by your bank, you’ll have to be able to prove that you are indeed suffering from significant financial hardship. When a lender sees that you are at least a month behind on your mortgage payments, they are more inclined to accept your proposal.

Additionally, property with liens on their title are not attractive to lenders for a deed in lieu. It’s also extremely important that all of your DIL application paperwork is filled out completely and correctly.

Deeds in lieu of foreclosure do appear on your credit report and will cause an impact on your credit score, though it will be much less of an impact than a foreclosure. Alternatives to filing for a DIL include applying for a loan modification and applying for federal assistance through the Home Affordable Modification Program (HAMP). Both of these options will avoid any negative effects on your credit report or credit score.

To learn more about the specifics behind filing for a deed in lieu of foreclosure or applying for a loan modification to make your payments more affordable, contact Veitengruber Law. We have achieved DILs for many clients before you, and we would love nothing more than to help you get the best result possible as well.


Photo credit: Images Money (flickr)