One of the best options for people facing foreclosure is the “deed in lieu of foreclosure,” or as it’s more frequently referred to, “deed in lieu.”

Essentially, this is the fancy legal term for what most folks would describe as “mailing the keys to the lender,” or as it’s being called lately, “jingle mail.”  Giving the the house back to the bank instead of waiting for it to foreclose.  There are some good reasons for doing this if you have the option.

The best reason for doing it is that you avoid any risk of the lender seeking a deficiency judgment for the amount by which the loan balance exceeds the property value.  (That’s assuming the lender has that right, which, in most cases in California at least, they probably don’t.  But that’s a whole different issue and beyond the scope of this post.)  The reason is that the deed in lieu documentation will include a release…That’s the quid pro quo that you get from the lender in exchange for saving themthe cost, legal expenses, time and procedural brain damage of having to go through the foreclosure process.   This is critical:  Do NOT do a deed in lieu if you don’t get the release!!!

The other good reason is that it expedites what is a painful and stressful process that most people would rather avoid.  You can be in and out fairly quick.

However, generally, it won’t work if you have more than one loan.  The reason is that, by taking the property by deed, rather than by foreclosure, the lender accepting the deed takes subject to the continuing obligation to pay any other existing encumbrances.  This is true whether the lender is in first, second or third position; if you get deeded a property, you take subject to the continuing obligation to pay other existing loans which are still of record.  In this current environment, most people have two or more loans, making the deed in lieu an impossibility. The foreclosure process actually wipes out junior deeds of trusts, or loans.

So if you’re considering a deed in lieu, or if some cocktail party lawyer has suggested it, before getting too excited about it, the two big questions to answer are whether you need it, or whether it is even possible.

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