A deed in lieu of foreclosure is an alternative to foreclosure, where the property owner (i.e., borrower) voluntarily transfers fee title to his property in exchange for the lender canceling the outstanding loan.
Lenders benefit from a deed in lieu of foreclosure by saving time and money in avoiding a lengthy foreclosure litigation, which is typically a protracted proceeding in a state such as New York. Borrowers also benefit from a deed in lieu of foreclosure by having the lender’s cooperation towards forbearance of their outstanding loan.
While generally desirable, there is no guarantee that the lender will accept a deed in lieu of foreclosure. Commonly, lenders will not accept a deed in lieu of foreclosure if there are other liens (e.g., junior mortgages, lines of credit, mechanic’s liens, etc.) on the property, because the lender’s title would be subject to those existing liens. One may, nonetheless, secure a deed in lieu of foreclosure by settling with the other lien holders separately, and thus clearing title for the lender of the senior lien; be advised, however, that this is an intricate process and takes time.
In some states, such as New York, transfer tax may be due when a lender accepts a deed in lieu of foreclosure, and the lender may require the borrower to pay such tax.