What is a Deed in Lieu

by Investing School on August 2, 2010

Deed-in-Lieu or deed-in-lieu of foreclosure is a deed instrument. This instrument will be used in cases where a borrower will forsake his or her deed on the property in question in order to avoid foreclosure proceedings.

Borrowers may choose to do this because it can be advantageous to both the borrower and the lender. The first advantage to the borrower is that it absolves him or her from all the debt that is related to the home in relation to the defaulted loan. The borrower will also avoid the humiliation associated with the foreclosure process, as well. Another benefit to the borrower is that his or her credit rating is affected but not affected as drastically as it would be had the borrower gone through a formal foreclosure process.

The lender has advantages because the company does not have to go through the cost of repossession of the property. It also lowers the risk of borrower revenge. This happens when the borrower is angry about the foreclosure and repossession of the property and will cause damage to the property before being evicted by the sheriff. Other advantages include the fact that many borrowers later file for bankruptcy which can benefit the lender.

In order to be considered for a deed-in-lieu of foreclosure, both parties have to enter into the agreement voluntarily and in good faith. The agreement must concede to at least equal to fair market value of the property. In some cases, the lender will not agree to the settlement because the borrower’s debt is greater than the fair market value of the property.

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