A Deed in Lieu of Foreclosure is a type of deed in which the borrower (homeowner) transfers all interest in their home to the lender to satisfy a defaulted loan and avoid foreclosure proceedings.
The Deed in Lieu of Foreclosure is commonly known as “giving the property back to the bank.”
Generally speaking, the following conditions must be met for a Deed in Lieu of Foreclosure to be considered a viable alternative:
- The indebtedness the lender is attempting to collect must be secured by your property
- Your home must already be listed (typically for at least 90 days) – and reasonably priced
- There can be no other liens on the property (e.g. tax liens, 2nd mortgages, etc.)
- The property cannot already be in foreclosure
- A Deed in Lieu of Foreclosure must be voluntarily agreed on by both parties – and both parties must act in good faith
- If the balance owed exceeds the value of the property, you (the seller) must have a financial hardship
- Consideration must be at least equal to the fair market value of your property
Warning: Please consult with your tax or legal professional. A Deed in Lieu of Foreclosure can lead to a potential tax liability. Under federal law, your lender is required to file a 1099-C (cancellation of debt) whenever a loan balance exceeding $600 is forgiven. This has the potential to create a tax liability because it may be considered as “income.”
For more information about Deeds in Lieu of Foreclosure, order our FREE Ebook, Foreclosure Alternatives: A Guide for California Homeowners (the order form appears at the top of this page).
