What Is A Deed In Lieu Of Foreclosure?

When a homeowner has defaulted on a mortgage becoming exposed to or involved in a mortgage foreclosure action there are several paths to pursue.  Fight the foreclosure by challenging the Bank’s right to foreclose based on various legal strategies, seek a loan modification or perhaps pursue a short sale.  Homeowners often times believe a “deed in lieu of foreclosure” is a potential solution. However attempting to convince the Bank to accept a “deed in lieu of foreclosure” is a lost cause.  “Deeds in lieu of foreclosure” are practically extinct, with good reason. A “deed in lieu of foreclosure” transfers title to the homeowner’s property to the Bank, theoretically avoiding the pains of the foreclosure process.  Seems practical for both the homeowner and the Bank.  However, when a Bank accepts title to the property in this manner, second mortgages, subordinate liens, and all outstanding homeowners/condominium association dues continue with the deeded property becoming a cloud on title and/or the Bank’s liability. To the contrary, a formal foreclosure process concludes with subordinate mortgages, liens, and most association dues (subject to certain “statutory safe harbor” amounts and property taxes), as no longer a lien on the property foreclosed.  This results in the Bank or third party purchaser being able to freely sell the property post-foreclosure, making the foreclosure process significantly more appealing to the Bank than a “deed in lieu of foreclosure.”