Difference Between Deed in Lieu & Foreclosure

Features

Foreclosure consists of a legal process in which the mortgage company gains ownership of a property after the borrowers have defaulted on payments. Each state has different foreclosure laws; however, in most cases the mortgage company needs to use legal counsel to complete the foreclosure process. A deed in lieu of foreclosure can eliminate the lender's need to take legal action against the borrowers. With this option, the borrowers sign a deed granting ownership of their property to the mortgage company. This generally takes less time and may cause less of a negative impact than foreclosure to the borrowers' credit scores.

Function

With both foreclosures and deeds in lieu, the bank gains ownership of the property in order to sell it. Typically, these properties are sold at a pubic auction. The starting bid generally begins at the amount the mortgage company is owed by the borrowers. Once the home is sold, the lender earns back its loss. However, the foreclosure or deed in lieu will appear as a negative impact on the borrowers' credit reports.

Impact to Credit

In some situations, it may be beneficial to use a deed in lieu to prevent foreclosure. However, this depends on the laws in the state where the property is located and some other factors. Negative remarks to the credit reporting bureaus begin after 30 days of non-payment. After that, another missed payment is reported every 30 days. Most mortgage companies do not begin foreclosure proceedings until after 60 to 90 days of missed payments. The process itself can take up to a year in some states. All the while, the borrowers' credit scores suffer. If possible, a deed in lieu can save time and negative remarks from begin reported.

Time Frame

The foreclosure process can be completed in as little as one month, or as long as one year. This depends on the specific laws in the state. Deeds in lieu of foreclosure generally take 3 to 6 months, depending on the lender. Often, the lender wants the borrowers to try to sell the home on their own, so that the lender does not have to use its own resources to sell the property. Typically, the mortgage company wants to see the home on the market for three months. If no bids are offered on the home, then the deed in lieu can be utilized. The borrowers should research the foreclosure laws in their state before making a decision whether to use a deed in lieu.