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A deed in lieu of foreclosure takes place when the homeowner transfers the property to the lender. The homeowner hand over the property to the lender, clearing all the debts they owe. The property is then owned by the lender. You have to vacate the property as soon as possible.
A lender should also hesitate before accepting a lieu deed where there are outstanding subordinate liens or judgments against the property. In such a situation, the lender will have to foreclose its mortgage, with the attendant expense and time involved to obtain clear title.
Disadvantages of a deed in lieu of foreclosure You will have to surrender your home sooner. You may not pursue alternative mortgage relief options, like a loan modification, that could be a better option. You'll likely lose any equity in the property you might have.
Disadvantages to Lender A lender should also hesitate before accepting a lieu deed where there are outstanding subordinate liens or judgments against the property. In such a situation, the lender will have to foreclose its mortgage, with the attendant expense and time involved to obtain clear title.
Drawbacks Of A Deed In Lieu No guarantee of acceptance: Your lender isn't obligated to accept your deed in lieu of foreclosure. Your credit will still take a hit: While a deed in lieu arrangement won't harm your credit as drastically as a foreclosure, you can still expect your score to drop.
Items that a lender should consider when determining which course of action to take include, among other things, the property location, the type of foreclosure process, the type of loan (recourse or nonrecourse), existing liens on the property, operational costs, status of construction, availability of title insurance, ...
What is a major disadvantage to lenders of accepting a deed in lieu of foreclosure? The lender takes the real estate subject to all junior liens.
Damage to your credit: While less severe than a foreclosure, a deed in lieu of foreclosure damages your credit significantly, and can make it difficult to qualify for another mortgage for several years.