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FHA Loans: Deed-In-Lieu of Foreclosure Rules

Borrowers having trouble making payments on their FHA mortgages are encouraged to contact the FHA and the lender as quickly as possible to discuss possible arrangements to help prevent the loan from going into default and foreclosure.

In some cases a loan forbearance may be possible or a refinancing of the FHA loan, but in more extreme cases the borrower may consider a move called deed-in-lieu of foreclosure, sometimes called deed-in-lieu for short.

A deed-in-lieu arrangement is for borrowers in default on their FHA loans who don’t qualify for any other HUD loss mitigation program. In essence, deed-in-lieu results in the borrower signing back the home to the mortgage company. FHA rules state that deed-in-lieu proceedings must be initiated within six months of the loan going into default, and there are circumstances where “a current mortgagor is eligible for the deed-in-lieu of foreclosure option” according to HUD guidelines.

FHA rules state there are certain requirements the borrower is required to meet in order to be eligible. Among the first items listed in the FHA’s information sheet on deed-in-lieu actions is that the borrower may be charged up to $2,000 as compensation to the lender.

FHA rules state the home in question must be owner-occupied unless there is documentation to prove loan default was related to the need to vacate the property. That need can include job loss, divorce or other circumstances. The borrower and lender must agree to terms in writing as to the condition of the property and the terms of the deed-in-lieu. Investment properties are not eligible for a deed-in-lieu agreement.

Once of the most important rules is connected to “walk aways”, or people who simply abandon the property and payments on the FHA loan. FHA requirements state that “under no circumstances” may a lender encourage the borrower to purposely go into default in order to take advantage of a deed-in-lieu of foreclosure option on an FHA home loan.

Borrowers looking into the deed-in-lieu of foreclosure option on their FHA mortgage loans are required to provide written explanation as to the circumstances and causes of loan default and may be asked to provide proof of income reduction or other hardship.

35 Responses to FHA Loans: Deed-In-Lieu of Foreclosure Rules

  1. Msteen says:

    Where does it state that if a homeowner is pursuing a DIL, that he MUST attempt to list and sell the property first? If he is upsidedown why would this be a requirement? Why do lender drag their feet for months, before reviewing the submitted hardship documents, then only to deny the request?
    Please share if you have any answers. thanks!

    • Joe Wallace says:

      Thanks for your question. For those who aren’t familiar with Deed-In-Lieu, according to the FHA: “A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from mortgagors who can financially make their mortgage payments.”

      There is a great deal of information on Deed-In-Lieu here:

  2. C. L. Rhoad says:

    I have an FHA loan. I listed my house in Oct-2011 and maintained my mortgage payment through April 2012. In Dec 2011 – I relocated from TX to WA State due a job change. Submitted Short-sale paperwork to Chase which they refused to consider because I was not in arrears. Now they want backup docs to put me into a “Deed in lieu” program. My issue is not financial hardship. My issue is that I cannot live in a house in TX since I live and work in WA State – and I cannot sell it. What are my options w/FHA to get out from under this mortgage? I cannot buy another home as long as I have this boat-anchor around my neck. Please advise.

    • Joe Wallace says:

      The real issue here isn’t so much what the FHA offers as which programs the lender is willing to consider–have you asked the lender what options they would consider outside a Deed-In-Lieu? Guessing you have already, but I would advise calling the FHA directly at 1-800-CALL FHA to get some advice on how to proceed and see if there is an option more advantageous to you than something connected with foreclosure, short sales, etc.

  3. Octavian says:

    My lender stated that it’s nearly impossible for a FHA loan to qualify for a Deed In Lieu. Is that accurate or are they not being honest about this?

    • Joe Wallace says:

      It might be best to speak with an FHA counselor on this issue–contact the FHA at 1-800 CALL FHA to discuss your specific circumstances and what your options may be.

  4. HOABoard of Directors says:

    If FHA proceeds with a Deed-in-Lieu on a condominium with owner delinquent HOA assessments, is FHA responsible for paying the delinquent assessments?
    In California, a Deed-In-Lieu is assuming all debts including delinquent HOA assessments (dues) to the property and therefore responsible for payment – is FHA any different?
    If so, please provide statue on this ruling.

  5. P Johnson says:

    My son has tried to sell, rent, short-sale his home after moving from MI to Washington DC. US Bank has been less than helpful and seems to undermine any attempt to unload this debt. He listed his house before moving to DC, no takers. He rented it for 2 years and now it sits empty. He asked for a short-sale approval and US Bank said to go ahead and list while they process paperwork. Two offers made and US Bank refused the sale because it was rented over 18 months. (actually 18 months and 6 days when we started the process). Now we inquired the new Deed-In-Lieu program to start in March 2013. US Bank said he doesn’t qualify because his FHA loan is backed by Michigan State Housing Development. Help, any suggestions?

  6. Karen Peryea says:

    Some banks are looking at a Deed in Lieu of a Foreclosure a “Foreclosure”.
    Is there something I can tell them or something to show that this is not a Foreclosure?

    • Joe Wallace says:

      It’s up to the discretion of the individual financial institution as to how they would apply that credit information when trying to approve your loan–the FHA can’t force a lender to issue credit, so the lender’s policies (so long as they are within the law) would apply in such cases.

  7. Jlanier says:

    We have had to relocate much like the other person above, and have had our home on the market for 6 months, but not in a short sale. We now have 2 mortgages and can barely keep our heads above water making all the payments. We have talked to the bank about doing a Deed in Lieu but they are telling us that FHA requires the home be in a short sale for 120 days before it can be considered for a DIL. Is this correct, or are they just telling us this because it would conveniently put it past the time that we would have no taxes to pay in Pres. Obama’s plan? Also, why would it need to be in a Short Sale, when we had already invested 6 months in a reg. Sale trying to get rid of it?

    • Joe Wallace says:

      FHA loan rules state: “The Deed in Lieu of Foreclosure (DIL) is the second Disposition Option in which a Borrower voluntarily deeds their collateral property in exchange for a release from all obligations under the mortgage. A DIL of Foreclosure may not be accepted from Borrowers who can financially afford their mortgage payments.” As far as the 120 day requirement, contact the FHA directly for further guidance by calling 1-800 CALL FHA.

  8. Crystal Dixon says:

    Is it a fact that if I where to do a deed in lieu (DIL) that I would have to fill out a I9 as part of my taxes at the end of the year. Example we are on the market to sell for 50,000 and deed in lieu short sale is for 20,000 me as the mortgager would have to put 30,000 as income on my taxes. Which is putting me to owe back 2x as much at the end of the year, due to the house, not selling and going into deed of lieu.

    • Joe Wallace says:

      You would need to consult a tax expert for advice in this area–we aren’t qualified to comment on tax issues. But you can call the FHA directly at 1-800 CALL FHA for assistance with short sale and DIL issues.

  9. J Marinovicz says:

    My wife and I completed our deed in lieu of foreclosure in May 2012. We’ve been renting since and saving a lot for a down payment on a future home. I’ve heard mixed statements from various institutions and real estate agents – exactly how long after we complete the deed in lieu, can we approach a bank for a pre-approval on a new loan?

  10. t phillips says:

    We are in our 80’s. Our health is going down hill. We are accumulating quite large medical bills rapidly (even with Medicare). It is becoming harder and harder to pay the mortgage on our underwater home. Is poor health and the need to move to Assisted Living considered a valid reason for a DIL on our FHA home?

  11. Thomas Mccabe says:

    We have an FHA Reverse Mortgage. We expect that after using the entire credit line the sale of the house may not cover the lone balance we owe. Would permission be granted for a shot sale or a ‘Deed in Lieu” if all other options are exhausted?

  12. Sandy says:

    We relocated from one state to another and had to move out of our home. We contacted the mortgage company about a deed in lieu. At first they said no problem and we submitted the docs they need for review, we even go a conditional approval. Now they are saying we have to apply for a loan modification first, we do not want to keep the property because we live 700 miles away. I was originally told that relocation was an exception to the FHA rules, can you verify this or lead me in the right direction please.

  13. divorcing says:

    My soon to be ex is on the deed but we’re both on the mortgage. He is working with the bank to complete a DIL. Do I have to be notified or agree to this since I’m on the mortgage? If the bank is going to forgive the debt shouldnt i know whats goung on? I currently live in the house and concerned I will be evicted without warning.

    • Staff Writer says:

      Are you a co-borrower? If you have not contacted the lender already, you should do so immediately and ask to be updated.

  14. Christina says:

    I currently have an FHA loan, I moved out of the property in 2008 due to divorce. My ex filed chapter 7 and surrendered the property and quit claimed it to me in 2010. I had a renter go into the property when my ex moved out. My renter stopped paying rent and is still living in the property as far as I am aware of. I filed chapter 7 bankruptcy in 2014 and surrendered the property in the bankruptcy as well. The mortgage payment has not been made since December 2014. I want nothing to do with the property and want to DIL back since no one is obligated for the mortgage and I wanted to save the “Lender” money instead of them wasting it through the foreclosure process. They advised me that I could not and I had to attempt to sell the property. I don’t have money for the realtor, or to fix the property up, there is no equity and the lender will not be receiving any more mortgage payments. What are my options? I’m not going to put up for sale, why can’t they just take the house back via DIL? this doesn’t make sense.

    • Staff Writer says:

      That would likely be due to lender standards. It’s an issue you would need to negotiate with the lender. Whoever is currently obligated to make the mortgage payments would be affected by a foreclosure in terms of credit rating, ability to apply for a home loan later, etc.

  15. tamara j says:

    My house is currently in a short sale status, have a propected buyer but mortgage company is taking there time. All this started due to major finanical hardship was told at the beginning of this whole mess that a seller could recieved some kind of relocation incentive. Not once did they said the loan could not be a fha, what the heck now they say i want get it. at the point to say the heck with the ss and do a deed in lieu any incetive fees for a seller that way? So frustated irritated mad sad ever emotion there is.

  16. R. H. COFFIN says:

    How do I get in touch with the DIL department within the HUD
    concerning FHA **********

    Thank you,
    Ralston Coffin

  17. J Ford says:

    I completed a deed in lieu about three months ago. According to the government guild lines, how long do I have to wait before I can refinance or purchase a home?

    • Staff Writer says:

      HUD 4000.1 states, “A Borrower is generally not eligible for a new FHA-insured Mortgage if the Borrower had a foreclosure or a DIL of foreclosure in the three-year period prior to the date of case number assignment. This three-year period begins on the date of the DIL or the date that the Borrower transferred ownership of the Property to the foreclosing Entity/designee.”

  18. Cindy says:

    Hi I have a question please: we went Chapter 13 about 8 years ago and paid the CH 13 off through the repayment plan. We also relinquished our home with a DIL of foreclosure. The house sat on the market for 7 years and finally sold last July. Three different banks have told us that we are not eligible yet to buy another home because we have to wait 2-3 years (depending on who we asked) after the home was transferred out of our name to the new owner. Please help!! How many years do we have to wait; is it 2 or 3? Thank you!!

    • Staff Writer says:

      Unfortunately lender standards will apply, and those standards will vary. So your wait time will vary depending on which lender you choose. In general, FHA loan rules state:

      “A Borrower is generally not eligible for a new FHA-insured Mortgage if the Borrower had a foreclosure or a DIL of foreclosure in the three-year period prior to the date of case number assignment. This three-year period begins on the date of the DIL or the date that the Borrower transferred ownership of the Property to the foreclosing Entity/designee.” Some exceptions are possible, depending on the lender, based on a reading of the following also from HUD 4000.1:

      “The Mortgagee may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the foreclosure.
      Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a Borrower’s Mortgage was current at the time of the Borrower’s divorce, the ex-spouse received the Property, and the Mortgage was later foreclosed. The inability to sell the Property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.”

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