A Deed In Lieu (DIL), which is the commonly used term for Deed In Lieu of Foreclosure, is a home disposition option in which a mortgagor voluntarily grants a collateral deed (your home) in exchange for a release from all obligations under the mortgage.
An interesting misconception about a foreclosure DIL is that many people feel like they can return the home to the bank at any time, without meeting any qualifying criteria. This is not true.
There are two main criteria that must be met before banks will accept a DIL, rather than going through the foreclosure process to repossess a home. First, there cannot be a second mortgage in a different bank than the bank that has the first mortgage. Think about it. In a DIL situation, the home can only be turned over to a bank. This is, of course, the bank that has the first mortgage. Therefore, if there is a separate bank that has a second mortgage, they will not accept a DIL because they will not receive anything and they will take a total loss on your loan. If the bank with a second mortgage does not accept a DIL, neither will the bank with the first mortgage.
The second common misconception about a Deed in Place is that a homeowner who wants to move out of their home, perhaps because the home is worth much less than it is owed, can easily do so through a DIL. The homeowner often thinks the bank will agree to this, as it will save them many thousands of dollars by not going through the full foreclosure process.
Unfortunately, this is not the case for homeowners who are not struggling financially. Banks generally will not accept a deed in lieu unless the homeowner is unable to make the mortgage payment. Typically, a homeowner will have missed several monthly mortgage payments and will present financial documents showing that they cannot make the mortgage payments, before a bank considers a deed in lieu of foreclosure.
The benefit of getting a DIL for the homeowner who has only one mortgage and cannot make their monthly mortgage payments is that the DIL allows them to get out of the house without a foreclosure on their credit report. The homeowner will still have late payments on his credit history, but it is much easier to recover from a DIL and then obtain another mortgage loan than a foreclosure.
As mentioned above, the benefit to the bank is cost savings. It costs a bank on average about $ 50,000 to go through the entire foreclosure process. Those lawyers are expensive! So if the bank can avoid most foreclosure expenses, and after exploring all the options they feel that a DIL is in the best interest of the bank’s financial interests, then they will award a DIL.
Please note that the DIL option should only be considered by homeowners who have already explored all possible options for keeping their home. It is rarely the best option and is typically only used when a homeowner must make the decision to apply for a DIL or to let the home go through foreclosure proceedings.
