Is a Deed-in-lieu safer or better than allowing a foreclosure?

Is a deed-in-lieu better than a foreclosure?

In a word, no. So what’s the difference?

In terms of your credit, there is no difference between a deed-in-lieu and a foreclosure. A deed-in-lieu merely saves the lender from spending the time and money to go through the foreclosure process.

The only difference to you is that you’ll probably know a definite date when you need to be out of the house – and you’ll probably need to be out sooner. With a foreclosure, your move-out date could be delayed for up to a year.

Meanwhile, under today’s guidelines, a foreclosure or deed in lieu will probably require 7+ years of good credit before buying a next home.

In addition, under California law, if you have a second mortgage that was not a “purchase money mortgage” the lender can come back on you for a deficiency after either a foreclosure or a deed-in-lieu. The only way to avoid that risk is through the short sale of your home.

The strange thing is, even though it’s more convenient, cheaper, and less time-consuming for the bank, you might not even be allowed to sign a deed in lieu. In order to be considered, you’ll have to fill out an application. And if you have two loans, you’ll probably be denied unless the same investor (not the same servicing company) owns both notes.

So… Is a deed-in-lieu better than a foreclosure?

Our answer is: “Don’t even consider it.” There simply is no benefit to the homeowner.

What about the January 2013 announcement from Fannie Mae?

In 2013 Fannie Mae announced that they’ll allow on-time borrowers to wipe out their mortgage debt through a new “mortgage release” program. This program is simply the re-naming of the deed-in-lieu process. And while it may be of benefit to homeowners in other states, it’s not a benefit to California homeowners. Here’s why.

Every situation is different. If you’d like specific answers that relate to your situation, call 619-929-1413 or write td@tomdunlap.com. We’ll be happy to analyze situation and provide the answers you need before making a decision that will affect your future.


Please note that the information provided on this San Diego short sale page is generic, academic information used for general information purposes and may not be construed as or relied upon as a promise for a specific outcome.

This site provides information about real estate, law, income taxes and credit scores as relates to borrowers in distress, short sales and similar situations. The site is designed to help users safely cope with their own needs. Information is not the same as advice — the application of law or regulations to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer, tax adviser or other specialist if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation. The models in photographs accompanying the testimonials on this website are used for illustrative purposes and are not a personal endorsement.

What is a Deed in Lieu?

A Deed In Lieu is just that: a deed back to the bank in lieu of foreclosure.

You are simply calling the bank to say you are done and they can come get the keys to your San Diego home.

If you have one loan, you will probably be allowed to sign a deed-in-lieu. If you have two loans, this is usually not an option. Oddly, while you’d think they’d welcome the opportunity to avoid the costs of a foreclosure, most banks require homeowners to submit an application to be approved for a deed-in-lieu transaction.

But why do it?

From a credit standpoint, this could be one of the worst choices anyone might make, because it has the same effect on your credit scores as a foreclosure. And, as with a foreclosure, if your San Diego home has a HELOC or second mortgage, you could be held liable for a deficiency.

The difference is that you’ll have to move right away rather than wait for the bank to complete their months of paperwork. Thus, if you’ve chosen not to attempt the short sale of your home and are willing to bear the damage to your credit rating, why not stay in the house and save your money?

Waiting for the foreclosure and saving your money would help you pay off other obligations and have money on hand for the deposit and first months’ rent when you do have to move.

Of course, selling on a short sale is preferable if you’re trying to lessen the damage to your credit. Another of the benefits of a short sale vs a foreclosure or deed-in-lieu is that you’ll be eligible for a new home mortgage 2 to 4 years sooner.

We’ve helped hundreds of San Diego homeowners complete short sales and we can help you. So call 619-929-1413 or write td@tomdunlap.com to ask questions and learn about the short sale process.


Please note that the information provided on this San Diego short sale page is generic, academic information used for general information purposes and may not be construed as or relied upon as a promise for a specific outcome.

This site provides information about real estate, law, income taxes and credit scores as relates to borrowers in distress, short sales and similar situations. The site is designed to help users safely cope with their own needs. Information is not the same as advice — the application of law or regulations to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer, tax adviser or other specialist if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation. The models in photographs accompanying the testimonials on this website are used for illustrative purposes and are not a personal endorsement.