According to the Department of Housing and Urban Development, The Deed-In-Lieu of Foreclosure allows a mortgagor in default, who does not qualify for any other HUD Loss Mitigation option, to sign the house back over to the mortgage company.

There are several important facts (a few quoted below from HUD) that need to be understood with a Deed-In-Lieu of Foreclosure option such as the following:

1) Process must be completed within 6 months of the date of default, unless there has been an extension of time granted or other extenuating circumstances.

2) The property must be owner-occupied and cannot be a “walk-away situation” or investment property.

3) There must be at least a 31 day delinquency of payment and a verified and acceptable hardship.

4) There may also be tax consequences as a result of a Deed-In-Lieu’s taxable income on the debt that is forgiven.

5) Additional Information can be found at: http://portal.hud.gov/fha/sf/svc/faqdilfact.pdf

Some banks require a short sale be attempted prior to a Deed-In-Lieu option exercised. Also, there has been speculation about the following:

1) A Deed-In-Lieu can be just as damaging to credit as any other means of getting out from under the property as payments have to be missed and there is a debt that is settled for less than what is owed.

2) A Deed-In-Lieu may not be an option if there are multiple liens against the property ie; 2nd mortgage, 3rd mortgage, home equity line of credit, or tax/HOA liens on the property.

3) Lenders are not as receptive to a Deed-In-Lieu option as they are to a Short Sale because they typically do not want ownership of the property as they are not in the business of selling homes. They may prefer a short sale where they never gain ownership of the property and simply take the loss and don’t have the hassles and expenses incurred with selling the property on their own or having it on “their books” for any period of time.