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Foreclosure Help: Deed in Lieu of Foreclosure

A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from mortgagors who can financially make their mortgage payments.  The Deed-in-Lieu of Foreclosure allows a mortgagor in default, who does not qualify for any other HUD Loss Mitigation option, to sign the house back over to the mortgage company.


A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.

The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts their credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy.

In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender.

Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parol evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.


Deed in Lieu of Exposure HUD Fact Sheet (PDF)


Mortgagee can pay up to $2,000 compensation, to the mortgagor. 

The property must be owner-occupied, no “walk-a ways” or investment properties. 

Exceptions: when it is verifiable that the need to vacate was related to the cause of  default (job loss, transfer, divorce, death), and the subject property was not purchased as a rental investment, or used as a rental for more than 12 months. 

The mortgagor must be 31 days delinquent or more at the time of the Deed-in-Lieu Warranty Special Deed is executed. 

The mortgagor must provide documentation of a reduction in income or an increase in living expense, and documentation, which verifies the borrowers need to vacate the property. 

Mortgagee will develop a written Deed-in-Lieu of Foreclosure Agreement, which is to be signed by both the mortgagor and mortgagee, which contain all of the conditions under which the Deed will be accepted. 

Tax consequences

When you go for deed in lieu, you may have to pay 2 types of taxes. These are:

Deed tax: Since deed in lieu foreclosure involves transfer of property, the borrower needs to pay state deed tax upon conveyance of property to the lender. Income tax on canceled debt: As per Mortgage Debt Forgiveness Tax Relief Act (applicable till the end of 2009), one need not pay tax on canceled debt (unpaid loan balance which is forgiven by lender) resulting from deed in lieu. However, a borrower needs to satisfy certain conditions for mortgage tax relief.


Under the IRS rules, only a primary residence can qualify for Mortgage Debt Forgiveness Debt Relief. As per the IRS rules, a primary residence is one in which the owner should have 2 years of ownership and occupation or 730 days. But this need not be concurrent. There can be short vacations but that will be considered as period of use. Other conditions include:  

  1. The debt should have been canceled by the lender in the years 2007 through 2012.
  2. The debt should have been taken to buy, build or improve a principal residence. Second homes, rental property or vacations homes are not applicable here.
  3. The tax relief is limited to debt amount of $2 million.
  4. The forgiven debt related to cash-out refinance or home equity loan is divided between the amounts required for buying, building, improving home and amounts used for purposes like tuition, payments of other debts, etc. The allowable portion for tax break is then calculated.

Additional Resources

HUD Foreclosure Help Options

How to Avoid Foreclosure HUD Info Sheet

DILF or no DILF from TAMU

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