What is a deed in lieu of foreclosure?

When a homeowner borrows money from a bank to buy a home the basic contractual agreement is that the bank lends money to the homeowner and the homeowner signs a promissory note which spells out the terms of repayment which is over a number of years at a stated rate of interest. If the borrower defaults on the loan, which is usually by failing to pay the monthly amount required under the note, the bank can then “accelerate” the terms of the note and demand payment in full. If the homeowner fails to make the payment the bank it can foreclose on the mortgage and cause a forced sale of the homeowners property. If the bank at the auction gets more than what is owed on the note, it is obligated to pay any surplus to the homeowner or other creditors of the homeowner who have liens against the house. If the bank gets less at auction than the amount due on the note it can sue the homeowner for the balance. An alternative to foreclosure is a homeowner gives a deed directly to the bank “in lieu” or instead of a foreclosure of the mortgage. This is beneficial to the bank because generally the homeowner will vacate the property and surrender possession to the bank which will save the bank the time and expense in foreclosing and it will give the bank an opportunity to put the house on the market and get it sold so it can realize on its loan. Generally in that kind of a transaction the bank releases the homeowner from any claim for a deficiency which is a substantial benefit to the homeowner. This arrangement however is a consensual one between the bank and the borrower. If one party or the other does not want to do it, then it doesn't happen.

If you have questions about this or any other legal matter, please contact Tom Bennett at (617) 531-6574 or tvb@barronstad.com.