Q: Can you please explain what a deed in lieu of foreclosure is and how it works? – Anonymous

A: In a deed in lieu of foreclosure, you surrender your home to the lender to avoid the hassle of the lender filing a foreclosure action against you. Essentially, you’re making a pre-emptive strike and going out on your own terms rather than being forced out. Psychologically and emotionally, that’s important for a lot of people.

In order for your lender to accept a deed-in-lieu, your title to the property must be clean, meaning you have no other liens or judgments against you. Further, most lenders are hesitant to accept many deeds-in-lieu for fear of opening the floodgates to other homeowners wanting to hand back their properties. Banks like short sales better because the homeowners are doing all the work of finding the buyers. Your lender probably will not even consider a deed-in-lieu unless you have already tried a loan modification or a short sale.

The beauty of a deed-in-lieu is the simplicity. Once your lender agrees, you just sign the documents and walk away. If you’re cooperative and leave the house in good condition, the lender may even give you a few thousand dollars in moving expenses, which is called “cash for keys.” You also may be released from ever having to repay the debt, but you should get a letter from the lender stating this before agreeing to a deed-in-lieu.

But there also are major drawbacks. While traditional foreclosures and short sales tend to drag on for months, deeds-in-lieu happen quickly, so you won’t have the luxury of taking your time to find a new place. Also, you may not be released from the debt, allowing the bank to come after you at a later date to repay the difference between what you owed on the mortgage and what the house eventually sold for. Finally, in a deed-in-lieu, just like with a regular foreclosure, your credit score will fall significantly.

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