What is Deed-in-lieu?

Ever wonder what it means when you hear a person talking about how they gave their home back to the bank for deed-in-lieu?

A deed-in-lieu is where you give the deed to your house to your lender and the lender does not foreclose. Thus, the concept “in lieu,” meaning “instead of.”

Deed-in-lieu is unloading your property back to the lender with little hassle. You can reach an agreement with your lender in advance as to how much money (if any) you will have to pay the lender. Your home will not be one sold at the foreclosure auction which in some states it is held right on your front porch. This can be quite an embarrassment for the homeowner.

In many deed-in-lieu arrangements, while the lender will agree to take the house back and cancel your loan, sometimes it comes at a cost, i.e., you will have to pay something for this. Compare this to a foreclosure, where you won’t know what the house will sell for, and in many states you can be sued for the difference between what you owe and what the house sold for (called a deficiency judgment).

PRO: Congress just extended the “forgiveness of debt” law for 2013, so in many situations you will not have to pay tax on the debt that was forgiven when the lender took the deed-in-lieu.

CON: Whether you lose your house by way of a foreclosure or a deed-in-lieu, your credit will be seriously impacted.