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Law Off of D.L. Drain P.A., Arizona Bankruptcy Lawyer | "Helping You Get Your Life Back on Track"
Law Off of D.L. Drain P.A., Arizona Bankruptcy Lawyer | "Helping You Get Your Life Back on Track"

Deed in Lieu of Foreclosure

Also referred to as a Deed in Lieu or “DIL”

Deed in Lieu of ForeclosureSite Producer2022-09-05T12:46:30-07:00

What is a Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is an agreement between the borrower and the lender to transfer ownership of the property without going through the normal foreclosure process. With a deed in lieu of foreclosure, borrowers may be able to avoid problems that could come up during the foreclosure process. The benefit for the lender is a deed in lieu is usually quick (assuming no title issues), therefore reducing both time and costs.

Both the lender and borrower need to understand their options and the consequences of each option.

When a property is in default, both the lender and the borrower need to think about their options. Rarely do both sides get the same things out of a deal. This means that both the borrower and the lender should get good legal advice before starting any process.

Lenders can be very cunning when it comes to promoting a deed in lieu of foreclosure.

Accepting a deed in lieu of foreclosure can help lenders avoid the costs of foreclosure and a process that could take a long time. Lenders have always wanted to keep the option of foreclosing on a property after a deed-in-lieu transaction has been completed if there are subordinate liens. Smart lenders usually do this by having a different subsidiary take ownership of the property, as long as the current loan is still in place, and making sure that the loan stays in place in the paperwork (this is called a “non-merger provision”).

A conveyance in lieu of foreclosure may have drawbacks.

For instance, if a loan has recourse, the lender may have some deficiency claims (meaning that they can sue the borrower). On the other hand, the property’s value may go down because of the foreclosure process. In Arizona, it takes at least 91 days for a non-judicial foreclosure and nine to twelve months for a judicial foreclosure. If someone files for bankruptcy, both deadlines will be extended.

A deed in lieu of foreclosure, a trustee’s sale, or a deed in lieu will always be on a borrower’s record.

But this is a foreclosure, and it will show up on the borrower’s credit report. This will make it harder for the borrower to get a loan for a new home in the near future. Most creditors think of a deed in lieu of foreclosure as a “foreclosure.” Usually, potential lenders would ask if the borrower has ever been involved in a foreclosure, trustee’s sale, or deed in lieu of foreclosure. So, a borrower’s record will always show a deed in lieu of foreclosure, foreclosure, or trustee’s sale.

The borrower on the subordinate lien will have a deed in lieu of foreclosure as well as a separate foreclosure on their credit record.

A deed in lieu of foreclosure can be a good idea in some situations. It is very important for both the borrower and the lender to get good legal advice before signing the agreement.

tax lien foreclosure

Trustee Sales & Foreclosure

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Eviction

Forcible Entry Detainer (FED)

Learn more about eviction, also referred to as a forcible entry and detainer.

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Deeds in Lieu

Where the grantee is the senior lienholder, the merger doctrine does not apply.

The highlighted definitions are from Wikipedia: A deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.

Both the borrower and the lender gain benefits from a deed in lieu of foreclosure. The primary benefit to the borrower is that it relieves him or her of most, if not all, of the personal debt associated with the defaulted loan. In addition, the borrower avoids the public scrutiny of a foreclosure case and may be offered more favorable terms than in a traditional foreclosure. A lender benefits from a reduction in the time and cost of a repossession, as well as a lower chance of borrower retaliation (metal theft and vandalism of the property prior to sheriff eviction) and additional benefits if the borrower files for bankruptcy later.

A deed in lieu is a less appealing choice for the lender if there are any junior liens. The lender will most likely not want to take on the junior liens’ liabilities from the property owner, thus it will prefer to foreclose in order to clear the title.

The indebtedness must be secured by the real estate being transferred in order for it to be considered a deed in lieu of foreclosure. Both parties must agree to the deal voluntarily and in good faith. The total compensation in the settlement agreement must be at least equivalent to the fair market value of the property being transferred. If the borrower’s outstanding debt exceeds the property’s current market value, the lender may refuse to proceed with a deed in lieu of foreclosure. Other times, lenders will accept because they will eventually own the home and the foreclosure procedure is expensive for them.

Because the instrument must be voluntary, lenders will often refuse to act on a deed in lieu of foreclosure unless they get a written offer of such a conveyance from the borrower that expressly says that the offer to enter into is given freely. This will put in place the parol evidence rule, which will safeguard the lender from any subsequent claims that the lender acted in bad faith or forced the borrower into the settlement. After then, both parties can start negotiating a settlement.

Neither the borrower nor the lender is normally obligated to proceed with the deed in lieu of foreclosure until a final agreement is made, but you should consult with an experienced attorney to understand your rights and responsibilities.

Edits from “Deeds in lieu: merger doctrine does not apply where grantee is senior lienholder”, By Benzion J Westreich & Scott C Cutrow, Katten Muchin Rosenman LLP (The full article was first published by the International Law Office.)

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