A “Deed in Lieu”, or Deed in Lieu of Foreclosure, is a specific type of real estate deed used as a foreclosure alternative. Also called a DIL, this type of deed basically allows a person who is behind on mortgage payments to avoid costly and time-consuming foreclosure proceedings. 

With a deed in lieu, the debtor basically transfers their deed to the lender or bank instead of rendering payments through foreclosure hearings. In other words, the deed in lieu is the instrument through which the debtor transfers their property to the lender to fulfill their debt. While the debtor will forfeit title to their property, it may work as an advantage depending on the person’s circumstances. 

When Can a Deed in Lieu Be Used?

The rules governing deeds in lieu of foreclosure will be different from area to area. But generally speaking a deed in lieu can only be used when:

  • The debtor has exhausted all efforts to sell the home professionally at its fair-market value price
  • The debtor does not have any other mortgages in default
  • The debtor truly doesn’t have the ability to make up the monthly payment(s) or the overall debt

Thus, a deed in lieu is somewhat of a “last-resort” effort for persons dealing with real estate debt. Another point is that it does still appear on the person’s credit report. Also, lenders may sometimes hesitate to accept a deed-in-lieu, because the debtor can sometimes reclaim the property through the right of redemption, if available. 

What If I Encounter a Dispute Over a Deed in Lieu?

In order to be valid, a deed in lieu needs to meet all the basic requirements for any deed, such as: names and contact info of the parties; a description identifying the property to be transferred; a statement indicating the debtor’s intent to transfer their property to the lender; and signatures of the parties.

If any of the statutory requirements for a deed in lieu are not met, this can cause a dispute over the validity of the entire agreement. For example, if the property cannot be easily identified from the deed language, a court may hold the deed to be invalid. This is similar to a contract dispute where the contract formalities have not been met. 

Other sources of disputes over deeds in lieu can include:

  • Use of force or coercion: The agreement to use a deed in lieu must be entered into voluntarily and freely; neither party can use force or coercion to make the other party sign an agreement.
  • Fairness: The transfer must be equivalent to the fair market value of the property being forfeited (i.e., the debtor usually can’t attempt to deed only a portion of the land or to convey at a lower cost).
  • Legality: The deed provisions can’t violate any state laws or statutes in any way. This is important, as deed rules may have specific differences in each state.

If the parties cannot reach an agreement regarding a deed in lieu, the parties may have to proceed with foreclosure proceedings. Again, this can result in a large amount of lost time and resources for both parties. In most cases, disputes can be avoided through clear drafting of the documents and a firm understanding of the deed by both parties. 

For these reasons, it is often best to work with a lawyer for assistance during negotiations.

Should I Hire a Lawyer for Help with a Deed in Lieu?

Foreclosure proceedings can present some difficulties, but a deed in lieu can be a viable option for many. If you have any questions, disputes, or concerns over a deed in lieu, you will want to contact a real estate lawyer in your area. Your attorney can draft and review documents for you, and can represent your interests in court if that becomes necessary.