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What is a deed in lieu of foreclosure?

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Quick Answer

A deed in lieu of foreclosure is a title-transferring document that delivers title from the homeowners to the bank that holds the mortgage, according to About.com. Banks are under no obligation to accept a deed in lieu of foreclosure. Another option used to avoid a foreclosure is a short sale.

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Full Answer

There are drawbacks to a deed in lieu of foreclosure, such as its negative effect on credit, the ability to buy another home in the future and potential liability for loan repayment, according to About.com. In order to buy another home, an individual must wait four years without extenuating circumstances and two years with in order to get a mortgage purchased on the secondary market by Fannie Mae or Freddie Mac. Comparatively, the wait for a foreclosure is seven years without extenuating circumstances and five years with, and the wait after a short sale can be as little as two years.

When pursuing a deed in lieu of foreclosure, one should make sure it specifically releases him from the liability of repaying the loan, advises Nolo.

A bank may reject a deed in lieu of foreclosure if doing so is not profitable, if there are junior encumbrances, if servicing guidelines prohibit it or the terms proposed are unacceptable, explains About.com.

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