A deed in lieu of foreclosure erases the homeowner’s debt by transferring the title to a bank or another institution. It has several benefits, among them saving the high court costs of a foreclosure and avoiding public embarrassment to the seller. The arrangement also gives the departing householder time to find new accommodations.
This is not the only way of avoiding foreclosure. Another method is loan modification, in which the terms of the lending agreement are renegotiated. An alternative tool is a short sale, which is finding a buyer who will pay less than the remaining value on the mortgage. Drawbacks for loan modifications are the necessity of third parties to make a deal and, for short sales, loan extensive paperwork.
Deeds in lieu of foreclosure do carry certain risks. There is the chance that the value of the property could fall short of the loan balance. Moreover, junior creditors may have claims on the property.
