If you fall behind on your monthly mortgage payment and cannot catch up, there are several options available to you. One such option is a deed in lieu of foreclosure.
This is an agreement in which you turn over ownership of your home to your mortgage lender in exchange for lesser penalties. Experian describes some of the advantages and disadvantages of this sort of arrangement.
Disadvantages of a deed in lieu of foreclosure
A deed in lieu prevents you from having to face some of the consequences that you would incur as a result of foreclosure, but it does require you to relinquish ownership of your home, meaning that you need to find somewhere else to live.
While some of the consequences of foreclosure are less with a deed in lieu, you may owe more in taxes because the IRS may count forgiven debt as income. Furthermore, it is at the lender’s discretion to decide whether to offer a deed in lieu; it is under no obligation to do so.
Advantages of a deed in lieu
If your lender forecloses on your mortgage, you could be responsible for paying the deficiency, i.e., the difference between the value of your home and what you still owe on it. In negotiating a deed in lieu of foreclosure, your lender may agree to waive the deficiency. This would mean that you are no longer responsible for paying it, though you may have to pay taxes on it.
Some lenders also offer to help cover your moving expenses as part of a deed in lieu arrangement. While a deed in lieu of foreclosure will show up on your credit report, it could prevent your score from taking as big a hit as it would otherwise.
A deed in lieu is one possible alternative to foreclosure. However, there may be other options available, including some that may be more appropriate for your situation.