A Deed in Lieu of foreclosure is an instrument mostly used in land loans. This is where the mortgagor or the borrower put into words all interest in a real property to the mortgagee. This is typically done to satisfy a loan that is due in order to avoid foreclosure proceedings.

This deed offers many advantages to both the lender and borrower. The main objective of the borrower is to immediately release himself or herself from a large amount of the personal indebtedness that is associated with the loan.  The borrower can also avoid the scrutiny of the public during a foreclosure proceeding. He or she can also receive more generous terms than one would have in a formal foreclosure.  In addition, this deed can also lessen the discrepancy it will do to your credit than a foreclosure will.  The lender will also save a lot of time and effort in the costs of repossession of the property. He could also gain some further benefits if the borrow will file for bankruptcy after the deed.

In order for it to be considered a deed in lieu of foreclosure, the indebtedness must be protected by the property being transferred. The two sides have to enter the deed voluntarily and most importantly in good faith. The agreement in the deed must have overall consideration that is at the least equivalent to the fair market value of the real estate being transferred. There are times when the lender will not continue with the deed because the indebtedness of the borrower is more than the current fair value of the real estate. There are other times when the lender will only agree due to the fact that they will in the end the property will also be given to them and the whole process of foreclosure will be a waste of time and resources.

Due to the requirement that the deed must be done voluntarily, the lenders will not act into a deed unless they had received a formal letter from the borrower which particularly says that the offer to enter into a deed is voluntarily. Afterwards, both sides can now proceed into negotiations. No one between the two will be obligated to proceed with the deed unless there is a consensus between the two.

There are some countries that have passed this law and have created many controversies between the borrowers and the lenders. In the city of New York, there is an existing act called the Home Equity Theft Prevention Act. This has been confused with the usual method of settlement in court cases. It remains to be unclear to the people whether this act also applies to the deed in lieu of foreclosure. There has been no precise exclusion in this matter. Most of the banks and title insurers in the city are not that willing to work on this kind of deed. Many would say that the hardest part is for both parties to cooperate with each other to avoid any future difficulties.