A deed in lieu of foreclosure is a mechanism allowing a borrower to escape foreclosure. A deed in lieu of foreclosure is issued when a borrower gives the deed to collateral property back to the lender. In return, the lender agrees to release the borrower from all the mortgage’s obligations.
A deed in lieu of foreclosure is usually only considered after a borrower seeks a forbearance, loan modification or new repayment plan from the lender. If the lender denies these requests, a deed in lieu of foreclosure saves the borrower from the embarrassment of foreclosure, and also leaves the borrower free from obligations under the mortgage.
Lenders may prefer a deed in lieu of foreclosure to avoid lengthy and expensive foreclosure proceedings. Short sales are a similar tool for avoiding foreclosure, and are often considered with a deed in lieu of foreclosure.