What Is a Deed in Lieu of Foreclosure?

How does a deed in lieu work?

You hand your mortgage company the deed to your home, and it takes the house instead of foreclosing on it. "In lieu" just means "instead of." The Consumer Financial Protection Bureau (CFPB), a federal agency, describes it as voluntarily turning over ownership of your home to avoid the foreclosure processSourceCFPB.

You don't find a buyer, and there's no auction. You ask your mortgage company, the company you send your payment to (your paperwork may call it 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 → ), 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 mortgage company can say no. Federal servicing rules don't require a servicer to give you any particular optionSource12 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 offerSource§ 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 lieuSourceHUD 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 applicationSourceFannie Mae D2-3.3-02.

Will I still owe the rest of the loan after a deed in lieu?

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 insurerSourceFannie Mae 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 termsSourceHUD 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 conditionsSourceFreddie Mac. 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 writingSourceCFPB.

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, and a deed in lieu isn't oneSourceRCW 61.24.100. Your state's page 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.

Can I get money to move after a deed in lieu?

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.

When do I have to move out after a deed in lieu?

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 rentSourceFannie Mae D2-3.3-02. FHA requires the home to be empty when it's handed over to HUD, unless HUD approves otherwiseSourceHUD Mortgagee Letter 2025-12.

How often do mortgage companies agree to a deal?

In May 2026, mortgage companies completed 15,855 deals to avoid foreclosure on Fannie Mae and Freddie Mac loans, 2,395 fewer than a year earlier, according to the Federal Housing Finance Agency (FHFA), which oversees the two companiesSourceFHFA. That's about two for every foreclosure started that month (7,979).

FHFA's count takes in every kind of deal, from loan modifications, repayment plans and forbearance to short sales and deeds in lieu. Its monthly count doesn't split out deeds in lieu. FHFA prints the total one month at a time; we keep every month in one record. It covers only loans Fannie Mae and Freddie Mac back.

The full monthly record, with a download, is on our foreclosure prevention actions on Fannie Mae and Freddie Mac loans page.

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 foreclosureSourceHUD 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 threeSourceFannie Mae B3-5.3-07. Other programs' waits are in the after-the-sale guide's table.

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 benefitSourceVA.

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. Two deadlines set the pace:

• Fannie Mae tells servicers to aim for a signed deed at least 30 days before any scheduled foreclosure saleSourceFannie Mae 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 timeSourceHUD Mortgagee Letter 2025-12.

What happens to a second mortgage in a deed in lieu?

It usually has to be released first, because the lender taking the house 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 liensSourceFannie Mae D2-3.3-02. HUD won't take an FHA home back with most liens still on it, including IRS and HOA liensSourceHUD 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 debt forgiven in a deed in lieu?

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-CSourceIRS 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 nowSourceIRS 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 sameSourceCFPB.

Deed in lieu vs. short sale vs. foreclosure

All three end with you leaving the house. They differ in how the house changes hands, and the wait for a new mortgage is shorter after a deed in lieu or short sale than after a foreclosure.

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.

Questions to ask before you sign a deed in lieu

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

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