property

deed in lieu of foreclosure

A voluntary transfer of property by a borrower in default to the lender in exchange for the lender canceling or reducing the debt, avoiding a formal foreclosure. It can save both parties time and expense. However, the lender takes the property subject to junior liens, so lenders often require clear title, and the borrower may still face credit or tax consequences.

Exam tip
A key trap: unlike foreclosure, a deed in lieu does not wipe out junior liens such as a second mortgage.
Example
Unable to pay, a homeowner signs the house over to the bank, which releases him from the $220,000 mortgage balance.

Related terms & state variants

Sources

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Last verified: 2026-10-23