Why Won't a Lender Take Back a Deed in Lieu of Foreclosure?

I am often asked why a lender wouldn't take back a deed in lieu of foreclosure when the homeowner offered his deed to the lender before he went into foreclosure. The lender will not consider a short sale or a deed in lieu of foreclosure until the homeowner is at least 90 days late on his mortgage or deed of trust payments in most states. In some states like Georgia, the foreclosure period is only 30 days so check what your state's foreclosure laws are before assuming anything or listening to anyone who is not an attorney.

Assuming you waited the mandatory 90 days to go into foreclosure as the lender requested, you next approach the lender and ask how to send him your deed. As soon as you were 60 days late, the lender has pulled your file and has started looking at the fair market value of your property to determine if they have an interest in taking your property back by your deeding them the property or if they need to continue the foreclosure.

The determining factors are both the market conditions in your area and the junior liens against your property. For example, if there are many foreclosures in the area as in Florida, California and Arizona, the lender may or may not want your deed back, especially if HOA (Homeowners Association) fees are also not being paid. Most states have limited the HOA fees to six months payment no matter how many months behind the homeowner is when the lender gets the property back.

The lender will even pay the property taxes without having a deed to the property because they don't want to have a senior lien (property taxes) come in ahead of their senior mortgage or deed of trust. So the lender will protect his first mortgage position against the property so his mortgage isn't "extinguished" at the auction sale. But if there are other junior liens against the property such as a second mortgage, HELOC (equity line), mechanic's liens, or other loans or liens junior to the first mortgage, the lender will never take back a deed in lieu of foreclosure. He would never do this because he would be accepting the responsibility of paying off these liens before the property's title could be sold or transferred.

The only viable alternative for the lender is to go through the foreclosure process and go to the foreclosure auction to buy the property with all the junior liens extinguished. When the auction is completed, the lender will get a title free and clear of junior liens and encumbrances. There could still be other lines that take precedent over the lender's first mortgage but these would have to have been extinguished anyway.

The reason a lender will not take a deed in lieu of foreclosure from a homeowner in foreclosure is purely an economic decision – simply if it benefits the lender, the lender will take the deed. If however, taking the deed gives the lender more liability, the lender will never take back a deed from the homeowner. Ironically, anyone looking to buy a pre-foreclosure property is generally very much better off to buy it as an REO (real estate owned) from the lender because the issues and problems will be solved before the property is sold to a buyer. Also, REO's are a greater financial burden on the lenders and are most often sold well below what is the final judgment amount from the court.