What Is a Deed in Lieu of Foreclosure?

How does a deed in lieu work?

"In lieu" just means "instead of." You hand the lender the deed to your home, and in return the lender takes the house instead of foreclosing on it. The Consumer Financial Protection Bureau (CFPB) describes it as voluntarily turning over ownership of your home to avoid the foreclosure process (CFPB).

You don't find a buyer, and there's no auction. You ask your servicer The company that collects your monthly mortgage payments. This may not be the same company that originally gave you the loan. Learn more → , the company you send your payment to, for help, and it reviews you for a deed in lieu along with its other options. If it approves one, you sign a written agreement, sign the deed over, and move out by the date the agreement sets.

Does my lender have to accept a deed in lieu?

No. It's an agreement, and your lender can say no. Federal servicing rules don't require a servicer to give you any particular option (12 C.F.R. § 1024.41(a)).

What those rules do require: if you send a complete application for help more than 37 days before a foreclosure sale, your servicer generally has to review you for every option your loan allows and tell you in writing what it will offer (§ 1024.41(c)). Loans backed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) all list a deed in lieu among those options. Other loans, including ones a bank keeps for itself, follow that lender's rules.

Common reasons a deed in lieu gets turned down or delayed:

• Other claims on the house. Fannie Mae and FHA both need a clear title, so a second mortgage, home equity line, tax lien or HOA lien usually has to be released first. More on second mortgages.
• You haven't tried to sell. For an FHA loan, the U.S. Department of Housing and Urban Development (HUD) requires that you've tried a short sale Selling your home for less than you owe on the mortgage, with the lender's approval. Less damaging to your credit than a foreclosure. Learn more → before a deed in lieu (HUD Mortgagee Letter 2025-12).
• Timing. For a standard FHA deed in lieu, the loan has to be at least 61 days behind when the deed in lieu is approved. A servicemember with permanent-change-of-station orders can qualify at 31 days when the deed is signed. Fannie Mae is different: it can consider you even if you're current, once you send a complete application (Fannie Mae Servicing Guide D2-3.3-02).

Will I still owe the rest of the loan?

Maybe. If the house is worth less than you owe, there's a leftover balance, often called the deficiency. Whether you're off the hook for it depends on who owns your loan and what you sign.

• Fannie Mae loans: if your loan has no private mortgage insurance, the servicer must release you from any leftover balance once the deed in lieu is done. If it has mortgage insurance, that can depend on the insurer (D2-3.3-02).
• FHA loans: HUD's rules call a deed in lieu a release from all obligations under the mortgage, and the written agreement must say you won't be pursued for a deficiency judgment if you meet its terms (Mortgagee Letter 2025-12).
• Freddie Mac, VA and other loans: Freddie Mac describes its standard deed in lieu as handing over the home in exchange for a discharge of the debt, if you meet its conditions. For VA and other loans it comes down to the written agreement. Read what it says about the balance before you sign.

The CFPB's advice holds for any loan: make sure the deed in lieu covers the entire amount you still owe, and if your state lets lenders collect a leftover balance, ask the lender to waive it, in writing (CFPB).

Your state matters too. Some states limit or bar collecting a leftover balance after a foreclosure, and those laws may not reach a deed in lieu. Washington's, for example, applies after a trustee's sale (RCW 61.24.100), and a deed in lieu isn't one. Your state guide says whether lenders there can get a deficiency judgment A court order requiring you to pay the difference between what you owed on your mortgage and what the home sold for at auction. Not allowed in all states. Learn more → , a court order to collect the leftover balance, after a foreclosure. A local attorney can tell you whether that reaches a deed in lieu.

Does a deed in lieu hurt my credit?

Yes. A deed in lieu is generally reported to the credit bureaus, and it will likely make it harder to get another mortgage or other credit for a while. That's the warning FHA servicers must give you before approving one, and they're barred from reporting a deed in lieu as a foreclosure (Mortgagee Letter 2025-12).

The wait before you can borrow again is shorter than after a foreclosure, at least for a new Fannie Mae loan. After a deed in lieu, the usual wait is four years, or two if you can document that a hardship outside your control caused it (Fannie Mae calls these extenuating circumstances). After a foreclosure it's seven years, or three (Fannie Mae Selling Guide B3-5.3-07).

With a VA loan, there's another cost: VA says a deed in lieu could mean losing some or all of your future VA home loan benefit (VA).

How long does a deed in lieu take?

There's no set length. A deed in lieu usually comes after other options have been tried, often including an attempt to sell. A few deadlines set the pace:

• Fannie Mae tells servicers to aim for a signed deed at least 30 days before any scheduled foreclosure sale (D2-3.3-02).
• For an FHA loan, if a short sale falls through, the servicer has 90 days to finish a deed in lieu or start foreclosure, unless HUD gives it more time (Mortgagee Letter 2025-12).

When do I have to move out?

Usually the house has to be empty when it's handed over. Fannie Mae's rules give three choices: move right away, stay up to three months without paying rent, or, if you have income and meet its other conditions, sign a lease for up to a year at market rent (D2-3.3-02). FHA requires the home to be empty when it's handed over to HUD, unless HUD approves otherwise (Mortgagee Letter 2025-12).

Can I get money to move?

You may. It depends on who owns or backs your loan, and your servicer can tell you which one that is.

FHA's amount is set by Mortgagee Letter 2025-12, in effect since October 1, 2025.

What if I have a second mortgage or home equity line?

The lender taking the house usually wants it free of other claims. Fannie Mae requires a clear title, and it lets the servicer pay other lienholders, such as a second mortgage lender, up to $6,000 in total to release their liens (D2-3.3-02). HUD won't take an FHA home back with most liens still on it, including IRS and HOA liens (Mortgagee Letter 2025-12).

If a second lender agrees to release its lien, ask one more question: is it also forgiving what you owe it, or only letting go of its claim on the house? Get the answer in writing.

Will I owe taxes on the forgiven debt?

You might. When a lender forgives part of what you owe, the Internal Revenue Service (IRS) generally counts the forgiven amount as income, and the lender may send you a Form 1099-C (IRS Topic 431).

A federal tax break for forgiven debt on the home you live in covers debt forgiven before 2026, or forgiven under a written agreement made before 2026. It generally won't help with a deed in lieu agreed to now (IRS Topic 431, IRS Publication 4681).

Other exceptions still apply. You don't count forgiven debt as income to the extent you were insolvent, meaning you owed more than everything you owned was worth, right before it was forgiven. Debt wiped out in bankruptcy doesn't count either. And if you weren't personally on the hook for the loan, which is called a nonrecourse loan, there's no forgiven-debt income at all, though other tax rules can still apply.

Talk to a tax professional before you sign. The CFPB suggests the same (CFPB).

Deed in lieu, short sale or foreclosure?

All three end with you leaving the house. They differ in how the house changes hands and what follows you afterward.

If your home is worth more than you owe, a regular sale may let you keep the difference. In a deed in lieu, the lender gets the house and whatever it's worth.

Still trying to keep the house? See every way to stop a foreclosure.

What should I ask before I sign?

Get the answers in writing, in the agreement itself if you can:

1. Does this release me from everything I owe on this loan?
2. How much moving money will I get, and when?
3. When do I have to be out, and what condition does the house need to be in?
4. What happens to my second mortgage or home equity line?
5. How will this be reported to the credit bureaus?
6. Will I get a Form 1099-C for forgiven debt?

A HUD counselor A housing counselor approved by the U.S. Department of Housing and Urban Development. They provide free help with mortgage problems and can negotiate with your lender. can go over an offer with you for free, and the CFPB suggests finding one (find a counselor near you). A foreclosure attorney can read the agreement before you sign it, and legal aid may do that for free.

Your state's rules

Your state guide covers foreclosure where you live, including whether lenders there can seek a deficiency after a foreclosure, with the law behind it.

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Colorado
• Connecticut
• Delaware
• District of Columbia
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• Tennessee
• Texas
• Utah
• Vermont
• Virginia
• Washington
• West Virginia
• Wisconsin
• Wyoming

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