Deed in Lieu of Foreclosure in New York: How It Works, Pros and Cons

If you cannot keep your home and want to avoid a foreclosure lawsuit, a deed in lieu of foreclosure may be an option. It can end the process sooner and with less damage to your credit than a completed foreclosure.

But it means giving up your home, and the details matter. Here is how a deed in lieu works in New York and what to watch out for.

What is a deed in lieu of foreclosure?

A deed in lieu of foreclosure (“in lieu” means “instead of”) is an agreement in which you voluntarily transfer ownership of your home to your mortgage lender. In return, the lender agrees not to foreclose and releases you from the mortgage.

In New York, foreclosure goes through the courts and can take years. A deed in lieu lets you and the lender skip that lawsuit and settle things by agreement.

How a deed in lieu works

1. Ask your servicer about loss mitigation options. A deed in lieu is usually reviewed as part of the same application used for a loan modification or short sale.
2. Submit a complete application with proof of your income, expenses and hardship.
3. The lender reviews your home. It will usually order an appraisal or inspection.
4. Review the offer. The lender sends a written agreement with the terms, including your move-out date.
5. Sign the deed and move out. You leave the home in good, clean condition by the agreed date.

Who usually qualifies?

Every lender has its own rules, but lenders often require that:

• You have a real financial hardship and cannot afford the home
• You have tried to sell the home first, often for at least a few months
• There are no other liens on the property, such as a second mortgage, home equity loan or judgment
• The home is in reasonably good condition and can be left empty

If there is a second mortgage or other lien, a deed in lieu is much harder. A short sale may be a better fit.

Pros of a deed in lieu

• Avoids a foreclosure lawsuit and the stress of court
• Often less damage to your credit than a completed foreclosure
• A shorter wait to buy again. Some loan programs let you qualify for a new mortgage sooner after a deed in lieu than after a foreclosure.
• A clear move-out date so you can plan your next step
• Possible moving help. Some lenders offer money toward moving costs. Always ask.

Cons of a deed in lieu

• You lose your home and any equity in it
• You may still owe money if the lender does not waive the rest of the debt (see below)
• It still hurts your credit, though usually less than a foreclosure would
• Possible taxes. Forgiven mortgage debt can sometimes count as taxable income. Ask a tax professional before you sign.

Get these things in writing

Before you sign anything, make sure the written agreement says:

• The lender waives any deficiency, meaning you will not owe the difference between the loan balance and the home’s value
• Your move-out date and any moving money you will receive
• How the lender will report the deed in lieu to the credit bureaus

Have a free housing counselor or attorney review the agreement before you sign.

Only sign your deed over to your lender

Deed theft is a serious problem in New York. Scammers may promise to “save your home” if you sign your deed over to them. A real deed in lieu is made only with your mortgage lender, through your servicer and with written terms. Never sign your deed over to a company or person who promises to stop your foreclosure. Read our guide to foreclosure rescue scams and deed theft.

Deed in lieu vs. short sale vs. foreclosure

A deed in lieu and a short sale both let you avoid foreclosure, but they work differently. In a short sale, you sell the home to a buyer for less than you owe, and the lender agrees to accept the sale price. Short sales can work even with a second mortgage. Homeowners who complete a short sale may also qualify for our Short Sale Relocation Grant to help with moving costs. Compare your options in our guide to short sale vs. foreclosure in New York.

Thinking about a deed in lieu? Get free help today

Abraxas Foundation is a New York nonprofit that helps homeowners understand their options and avoid foreclosure. We meet you at your home, our help is completely free, and we can refer you to free legal assistance and HUD-approved housing counselors.

Call (929) 346-5734 or tap the button below for a free, confidential review.

Helpful official resources: NY Courts CourtHelp: Foreclosure and NY DFS Foreclosure Consumer Bill of Rights.

This article is general information, not legal, tax or financial advice. Speak with a housing counselor or attorney about your situation.