What Is a Deed in Lieu of Foreclosure in California?

How a deed in lieu works

The Consumer Financial Protection Bureau describes a deed in lieu as an arrangement where you voluntarily turn over ownership of your home to the lender to avoid foreclosure. Instead of an auction, you sign a deed to the lender, move out on an agreed date, and the loan is resolved under the terms you negotiate.

It is usually considered after other options have been tried, such as a loan modification or a short sale. Many lenders want to see that the home was marketed first.

Why lenders say no

A lender is not required to accept a deed in lieu. Common reasons it gets turned down:

• Other liens. A deed in lieu does not wipe out junior liens the way a completed trustee sale can, so lenders generally want a clean first lien with no second mortgage, HELOC or judgment liens behind it.
• Investor rules. The owner of your loan may require a listing period before it will take the property back.
• Condition. The lender will want the home in reasonable shape and vacant on the agreed date.

The deficiency question

This is the part homeowners miss. California's anti-deficiency statutes, Code of Civil Procedure sections 580b and 580d, are written for foreclosures. A deed in lieu is not a foreclosure, so those protections do not apply on their own. California has no statute that bars a deficiency after a deed in lieu.

That makes the paperwork critical. The CFPB advises making sure the agreement covers the entire amount you still owe, and getting any deficiency waiver in writing. Have an attorney read the agreement before you sign.

Taxes and credit

• Taxes: The CFPB notes you may still incur a tax liability. Forgiven debt can be treated as income, and the transfer can also be treated as a sale. A CPA should run your numbers first.
• Credit: A deed in lieu is reported to the credit bureaus, and its effect on your score is generally comparable to a foreclosure.
• Buying again: Fannie Mae guidelines generally require a 4 year wait after a deed in lieu or short sale, versus 7 years after a foreclosure.

This is general information, not legal or tax advice. Talk to a California attorney, a CPA, or a HUD-approved housing counselor about your situation.

How to ask for a deed in lieu

1. Call your servicer and ask what loss mitigation options it offers. A deed in lieu is usually one of several.
2. Expect to submit a hardship letter and financial documents, much like a modification or short sale application.
3. Many servicers will ask you to list the home first. If it doesn't sell, the deed in lieu becomes more likely.
4. Get a title report so you know about every lien before the lender finds them.
5. Review the written agreement with an attorney, especially the release language and the move-out date.

Throughout, keep talking to the lender. In Joe's words, the worst thing you can do is isolate yourself and not communicate. If it is hard to do that yourself, Joe and his team can communicate with the lender on your behalf.

Deed in lieu vs short sale vs a regular sale

If you have equity, you should not give the house back. Sell it, pay the loan in full, and keep the difference. Joe Hall can list the home or, if you need speed, sell it off market to verified cash buyers. See your selling options.

If you owe more than the home is worth, a short sale is often the cleaner route in California, because Code of Civil Procedure section 580e generally bars a deficiency after an approved short sale of a one to four unit home. A deed in lieu makes most sense when the home won't sell, the lender prefers it, and you get a full written release.

If a sale date is already set, read how AB 2424 can postpone it while you work out which option fits.

Questions to ask before you sign

• Does this agreement release me from the entire balance, in writing?
• What happens to my second loan or any other liens?
• What is my move-out date, and is any relocation assistance included?
• How will the lender report this to the credit bureaus?
• Have I talked to a CPA about the tax effect?