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It is very important that you obtain legal advice from an experienced attorney regarding your particular situation. Consultation before you take action will certainly cost you less than it will cost to fix your unintentional errors.



There are times that foreclosure is best for the lender.

foreclosureLenders and borrowers (homeowners) faced with the default of a secured debt on real property have the option to work together in order to resolve the default.  If the lender and borrower can cooperate, the simplest option may be to let the property go through foreclosure, allowing the borrower to avoid wasting time and the purchaser in the foreclosure (perhaps the lender) to take over the property free of all junior liens.

There may be pitfalls to a deed in lieu.

For example, the lender may have some deficiency claims for a loan that is recourse (meaning that they can sue the borrower).   Or the property depreciates during the foreclosure process.  A non-judicial foreclosure in Arizona which takes at least 91 days and a judicial foreclosure a minimum of nine to twelve months.  Both dates will be extended if bankruptcy is filed.

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

Under certain circumstances, the lender and the borrower will attempt to negotiate a deed in lieu of foreclosure transaction. A deed in lieu of foreclosure is the consensual transfer of title to the property from the borrower to the lender in order to avoid formal foreclosure proceedings.  From the borrower’s perspective (even though it is incorrect), a deed in lieu may helps them to avoid the stigma, public fallout and reduction in credit rating that might come as a result of foreclosure proceedings.  Not true – this is a foreclosure, this will appear on the credit reports and will affect the borrower’s ability to finance a new home in the near future.  A deed in lieu of foreclosure is a “foreclosure” as far as most creditors are concerned.  Typically potential lenders will ask the borrower whether he, she or it has ever been involved in a foreclosure, trustee’s sale or a deed in lieu.  Therefore, the deed in lieu, foreclosure or trustee’s sale will always be part of a borrower’s record.

deed in lieu

Lenders can be very crafty in how they sell a deed in lieu.

For lenders the acceptance of a deed in lieu can help them to avoid foreclosure costs and potentially lengthy foreclosure proceedings. Lenders have also typically sought to retain the option to foreclose on a property after completing of the deed in lieu transaction if there are subordinate liens.  Typically the savvy lenders do this by having a separate subsidiary take title to the property, subject to the existing loan, and providing in the documents that the loan survives (a ‘non-merger provision’).

The credit consequences to the borrower on the subordinate lien is that there will be both a deed in lieu and a separate foreclosure on their credit report.

Sometimes a deed in lieu can be beneficial in certain situations.  It is extremely important that both the borrower and the lender obtain competent legal counsel before entering into the agreement.


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.

bankruptcyThe deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure.  Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy.

If there are any junior liens a deed in lieu is a less attractive option for the lender. The lender will likely not want to assume the liability of the junior liens from the property owner, and accordingly, the lender will prefer to foreclose in order to clean the title.

In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender.

Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parol evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.

deed in lieuNormally, neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached, but make sure to work with an experienced attorney in order to know your rights and obligations.

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.) 

Read the full article….