Deed in Lieu of Foreclosure: What is It and How Can You Use It? | Investor’s Guide [2023]

The deed in lieu of foreclosure process is an important tool note investors can use to repossess a property. Whether you own non-performing notes or you plan on buying notes, learning about the different ways to foreclose on a property (and knowing which one to use) can save you time and money.

In this guide, we’ll cover how the deed in lieu of foreclosure process works, how investors can benefit from it, and what to watch out for when working with borrowers with non-performing loans.

What is a Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is a method by which a borrower can be released from a mortgage agreement. During this transaction, a borrower signs the property deed over to the lender to satisfy the mortgage. Lenders and borrowers benefit from the deed in lieu process as it’s typically less involved and more cost-effective than a foreclosure.

Though it can be a good option for all parties involved, a deed in lieu of foreclosure isn’t necessarily a clean and easy way for homeowners to get out of a mortgage.

Lenders must agree to the settlement method and often require that borrowers provide proof of financial hardship and recent pay stubs.

In most cases, a deed in lieu is a borrower’s last attempt to prevent foreclosure after all other efforts fail.

How a Deed in Lieu of Foreclosure Works

A deed in lieu of foreclosure transfers property deed ownership from the defaulting borrower to the lender or investor who holds the non-performing loan (note). Both parties sign a transfer document that needs to be notarized, and then the borrower presents the property deed to the lender in exchange for total loan forgiveness.

In an ideal scenario, when the process is complete, the lender will have a marketable property deed in hand. The borrower will be released from the mortgage terms and repayment liability, with minimal, if any, money exchange.

Who Starts the Deed in Lieu Process?

Typically, the borrower proposes the deed in lieu option to prevent the lender from beginning foreclosure proceedings. A lender can then choose to accept the method, present another option, or move forward with a standard foreclosure.

Deed in Lieu vs. Foreclosure

A deed in lieu and a foreclosure end the same way; the defaulting borrower loses rights to the property. However, the property ownership transfer process varies between the two.

A handshake
A handshake

Often called a “friendly foreclosure,” deed in lieu allows borrowers and lenders to reach a debt settlement agreement without court proceedings, public auctions, and negative credit score impacts from a foreclosure.

During deed in lieu transactions, lenders and borrowers typically communicate directly and can work out a solution that satisfies both parties. Borrowers often negotiate a “cash for keys” deal with the transaction. In this scenario, the lender agrees to pay the borrower up to $5,000 in relocation costs if the borrower agrees to expedite the transfer and move-out process.

In contrast, the foreclosure process has little wiggle room, no borrower perks like money for moving expenses, and most communication is minimal, usually done through official documents and legal proceedings. When property conditions are poor, loan balance exceeds property value, or other debt is tied to the title (or all of the above), investors may benefit from repossessing a property through a foreclosure vs. a deed in lieu.

Bottom line: Deed in lieu almost always benefits a borrower facing foreclosure, but it may not be the best route for investors attempting to collect on a non-performing loan. Investors should assess all property and loan variables before accepting or offering a deed in lieu of foreclosure arrangement.

Pros and Cons of a Deed in Lieu of Foreclosure for Lenders


  • Fast process (typically 90 days to complete)
  • Lower overhead than a foreclosure
  • Lender can resell the title almost immediately after repossession (in most cases)
  • No need to initiate, advertise, and hold a public auction
  • Transaction is usually protected from any borrower bankruptcy filings in the future as long as the property had no equity at the time of the deed in lieu fulfillment


  • Costs and complications if outstanding junior liens are on the property’s title
  • Agreement terms vary and must be meticulously written and executed to ensure property transfer can be completed
  • Mortgage balance may be higher than the property value, with no way to recoup the negative equity
  • Most properties in pre-foreclosure or default status don’t qualify for a deed in lieu of foreclosure option due to existing junior liens, Loan-to-Value (LTV) ratio, or borrower situations

Pros and Cons of a Deed in Lieu of Foreclosure for Borrowers


  • Fast process (typically 90 days to complete)
  • Transaction is discreet – no advertised public auction
  • Lender may offer borrower cash upfront in exchange for a speedy move-out
  • Usually doesn’t impact credit score as negatively as a foreclosure or short sale
  • Potential to be released from all debt and deficiencies tied to the property without penalty or legal judgment


  • Credit score will still take a substantial hit
  • May not qualify for new mortgage loan for at least three years after deed in lieu transaction
  • Forgiven or canceled debt is considered income, and borrower will be taxed on the deficiency amount (the difference between property value and loan balance)
  • Borrower is still responsible for any junior title liens. If the borrower can’t clean up this debt, the lender may opt for a foreclosure instead of deed in lieu.

Should Investors Offer a Deed in Lieu of Foreclosure to Borrowers in Default?

Short answer: It depends. In some scenarios, it could be a good option if:

  • The property’s title is clean, with no other liens or judgments
  • The mortgage balance doesn’t exceed the property’s estimated value
  • The property’s in good condition
  • The property doesn’t have potential environmental liabilities (most common with commercial or industrial sites)

Every distressed property comes with unique circumstances, and investors should carefully assess each situation before offering a deed in lieu to a borrower.

Steps of the Deed In Lieu of Foreclosure Process

Step 1: Lender or borrower in default offers deed in lieu of foreclosure option. Either party may propose a deed in lieu, though often, it’s the borrower who initiates it. In this case, the lender may require title status information and evidence of financial hardship before considering or accepting a deed in lieu arrangement.

Step 2: Borrower submits requested documentation, which may include recent paystubs, outstanding debt records, and bank account balances. Upon reviewing the borrower’s circumstances, a lender can determine whether it’s reasonable to move forward with a deed in lieu option.

Step 3: Lender performs due diligence on the property. Deed in lieu due diligence involves a few aspects, including checking title status, property valuation, and environmental conditions or potential liabilities.

Other due diligence measures may apply, depending on the property and its history, the existing owner (borrower), and junior liens or judgments tied to the deed. If the due diligence process exposes any issues, the lender may opt to pursue a foreclosure instead.

Step 4: Lender and borrower sign a deed in lieu of foreclosure agreement outlining the deed transfer terms and conditions. Within this document, the parties declare and document all aspects of the transfer, and a notary signs it.

If the borrower owes more than what the property is worth, the lender may require the borrower to pay the difference at the time of transfer. Sometimes, borrowers can “cancel” or negotiate forgiveness of this debt within the deed in lieu agreement.

Step 5: Borrower turns over the property deed to the lender. At this point, the borrower must vacate the property based on the timeline established in the deed in lieu agreement.

Alternatives to Deed In Lieu

A deed in lieu of foreclosure is usually the last resort on the path to pursuing property foreclosure. Most scenarios are less than ideal for a clean deed in lieu exchange, so it’s usually best to explore other repayment avenues first.

Loan Modifications

Working out revised loan terms with a borrower is one of the best ways to get a note re-performing. These modifications vary based on lender and borrower needs and specific circumstances. Either the lender or the borrower can propose a modification.

Typical Mortgage Loan Modifications Include:

  • Repayment Plan – allows borrowers to repay past-due mortgage payments and late fees in equal monthly payments spread out over a few months to a year. Borrowers must also pay monthly mortgage payments to stay current.
  • Forbearance – a temporary option allowing borrowers to reduce or stop making monthly payments for a short period. A forbearance agreement doesn’t mean the payments go away; borrowers are responsible for full repayment (or a repayment plan) when the agreement’s term expires.
  • Rate or Term Change – a long-term loan restructuring that modifies a loan’s interest rate and term to reduce a borrower’s monthly payment
  • Loan Extension – enables borrowers to skip payments without penalty and add them to the end of the loan term

Is Loan Modification Different from Refinancing?

Yes. The goal with loan modifications is to make changes to the original loan’s existing terms or conditions to enable successful repayment. Most lenders won’t consider pursuing modification options unless the mortgage is in distress (one or more late payments) and the borrower can provide proof of financial hardship, such as sudden job loss or unexpected debt.

Refinancing a loan replaces the original loan agreement entirely and requires full credit checks and property assessments to complete. This option is suitable for borrowers current on their loan who are hoping to take advantage of better interest rates, different terms, or want to work with a different lender.

Short Sales

Short sales occur when a lender agrees to take less than the loan amount to satisfy a mortgage in default. Once a lender has approved a short sale, the borrower can attempt to sell the property through a managed sale.

If the property is sold, the lender is paid from the proceeds. The lender will either forgive the difference, aka cancel the debt, or file a deficiency judgment against the borrower. Some states prohibit lenders from filing a judgment if the property was approved for a short sale.

If the property doesn’t sell, lenders can pursue other options, such as a deed in lieu or a foreclosure.

Credit Impacts of Deed in Lieu, Short Sale, and Foreclosure

TypeAverage Credit Score DropFuture Mortgage Eligibility (Lender Waiting Periods Vary)
Deed in Lieu50-100 points3-4 years
Foreclosure100-160 points3-7 years
Short Sale100-150 points2-4 years
Loan ModificationVaries – usually minimal compared to foreclosure or short saleVaries – usually minimal compared to foreclosure or short sale

Deed in Lieu FAQs

How Long does a Deed in Lieu of Foreclosure Take?

The process typically takes 90 days to complete. However, depending on the state and specific circumstances, the timeframe can vary a bit.

What is a Friendly Foreclosure?

A “friendly foreclosure” is another term for a deed in lieu (DIL) of foreclosure. This repossession process is typically easier for both parties involved and is usually less damaging to a borrower’s credit than a foreclosure.

Does a Borrower Need to Pay Taxes on Canceled Debt?

Stack of Bills
Stack of bills

Yes, most canceled debt is taxed as income. Borrowers who complete a deed in lieu of foreclosure transaction involving a forgiven deficiency must report it using a 1099-C form* when filing annual tax returns.

Borrowers may be able to reduce tax liability on canceled debt through an insolvency exclusion. A borrower may qualify for the exclusion if their assets are valued less than the debt they owe.

*Forms and reporting requirements may vary – consult a tax professional for specific details.

How Do You Buy A Deed In Lieu of Foreclosure Property?

The first step in buying a property using a deed in lieu of foreclosure is owning its mortgage note (loan). Once you own the note, you can establish a repossession method, which could be a short sale, a deed in lieu of foreclosure, or a foreclosure.

It’s also possible to buy a foreclosure from a bank that’s repossessed the property using a deed in lieu of foreclosure agreement. However, once the bank’s completed the process, the property is considered Real Estate Owned (REO), so you’d be purchasing the REO property instead of buying the note.

Where Do You Find Bank Decision-Makers and Notes for Sale?

BankProspector. Platform users have access to 79,795 bank contacts and real-time loan data, making it easy and efficient to find and communicate with banks ready to sell notes. Alternatively, investors can manually search for decision-maker contact information using bank websites, networking sites like LinkedIn, and institutional lender records.

Join our free webinar to learn more about how to buy notes from banks.

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