Deed in Lieu

• A deed in lieu of foreclosure is an alternative for homeowners who want to get rid of their debt as soon as possible, without going through a lengthy court process or short sale. The deed in lieu transfers the ownership of the property to the lender entirely, without any strings attached. In response, the lender closes the debt account and removes any claim against the borrower for remaining debt that may be late or unpaid. The homeowner loses the house, but the process is completed quickly.
  
  

Equity Transfer

• In a deed in lieu of foreclosure, the equity in the house is transferred from the borrower to the new owner, the lender that created the mortgage. Previously, when the borrower held the house, equity was trapped in the money owed on the house and may have been quite low, depending on the current market price of the house. But when the deed transfers ownership to the lender, the debt against the house vanishes, and all equity is restored. This means the lender is essentially turning the mortgage debt into equity in order to recover losses on the mortgage.
  
  

Equity and REO Sales

• An REO, or real estate owned, sale occurs when a lender has possession of a house and sells in on the open market in order to make a profit, usually to recoup losses on a defaulted mortgage. Lenders also sell properties when they receive them through a deed in lieu of foreclosure. In selling, the lender is turning the house's equity into cash. The lender receives payment; the borrower receives the equity. If lenders sell in a burgeoning housing market they may be able to recover all the debt owed or even more; but in a declining house market, equity falls and the lender may still take a loss.
  
  

Considerations

• Homeowners considering a deed in lieu of foreclosure should note that equity is entirely transferred over to the lender in return for the closing of the account. This can yield several advantages. Notably, the lender no longer has any claim over the borrower. In other alternatives like short sales, even after the house's equity is capitalized, the lender may still be able to seek payment for remaining debts. But in a deed in lieu, the homeowner is absolved of any further debt obligation. However, a deed in lieu will drop a homeowner's credit score the same way a foreclosure would, lowering it by hundreds of points and staying on the credit report for at least seven years.