Some homeowners who are having problems making their mortgage
payments may think that a deed-in-lieu of foreclosure â€“ in which the
lender agrees to take back the keys and let the homeowner walk away â€“
is better than spending the time trying to do a short sale. This may
seem even more appealing to homeowners because with a deed-in-lieu, the
owners potentially can receive a few months of free rent.
Although Fannie Mae and Freddie Mac recently updated their
guidelines for deeds-in-lieu of foreclosures and now allow homeowners
with hardships to live in their homes for up to three months without
making mortgage payments, lenders rarely approve these transactions.
A primary reason lenders are reluctant to approve deeds-in-lieu is
that California allows non-judicial foreclosures, meaning the property
is foreclosed through a trusteeâ€™s sale rather than the relatively
lengthy judicial foreclosure process required in other states.
Additionally, lenders only approve deed-in-lieu transactions if
there is a single loan on the property or multiple loans with the same
lender, which also greatly limits their usefulness, according to one
broker. This makes doing a short sale a better option.
With a deed-in-lieu, striking a deal with a first, purchase-money
lien holder does not automatically get the homeowner off the hook when
it comes to second or other junior loans.
By contrast, in a short sale, all lenders must sign off, and
California law requires them to forgive any remaining balance after the
Finally, in a deed-in-lieu agreement, a lender can request
additional cash contributions be made by the homeowner, which are
illegal in a short sale.