A deed-in-lieu of foreclosure is one option heirs have for disposing of property with negative equity. Usually, people choose this option when the reverse mortgage loan balance exceeds the home’s market value. When a reverse mortgage is involved, a deed-in-lieu of foreclosure allows inheriting heirs to walk away from a property without taking on debt.
What Is a Deed-in-Lieu of Foreclosure?
A deed-in-lieu of foreclosure (aka deed-in-lieu) is a legal arrangement between a borrower and lender where the borrower voluntarily transfers ownership of the mortgaged home to the lender in order to avoid the foreclosure process. But this isn’t your only choice when a reverse mortgage matures. You may instead:
- Choose to sell the home yourself and pay off the loan.
- Keep the home and repay the loan via another mortgage, cash, or other funding sources.
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Foreclosure Versus Deed-in-Lieu of Foreclosure
Though they sound similar, a foreclosure and a deed-in-lieu of foreclosure are vastly different. A typical foreclosure is a legal process used by a lender to force the sale of a home used as collateral for a loan when a borrower has stopped making payments on the mortgage. A deed-in-lieu of foreclosure is a voluntary transfer of the deed to the lender that is often applied when the original borrower has passed away.
When you sign a deed-in-lieu with a reverse mortgage, the lender releases you from any further financial obligations. There are no foreclosure proceedings and no impact on your credit score. There is just a paper transfer.
When You Should and Shouldn’t Consider a Deed-in-Lieu of Foreclosure?
Ultimately, the choice is yours, but your decision is likely to come down to simple math. If you think the loan balance on the house you’ve inherited is more than what you could sell the home for, then a deed-in-lieu may be a good option.
Conversely, if the overall real estate market conditions are favorable, and you decide the property’s estimated value is at or above the loan balance, signing a deed-in-lieu might not be the best idea. In that case, you may choose to sell the home yourself and keep any remaining proceeds after paying off the loan.
Inheriting a home with or without a reverse mortgage can be stressful, so it’s important to understand your options. Heirs should never feel pressured to deed the property to the lender; the transfer is voluntary.
To help you navigate the process of deciding whether to sign a deed-in-lieu of foreclosure or go another route, it’s always best to contact a reputable real estate professional or real estate attorney with reverse mortgage expertise.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
