Is a deed in lieu of foreclosure an acceptable alternative to a foreclosure?

Maybe. . . Maybe not . . .

A deed in lieu of foreclosure (DIL) is sometimes given by the trustor to the beneficiary in order to avoid having the beneficiary foreclose. This procedure may be of benefit to both the trustor (borrower) and the beneficiary (lender), but there are also risks involved - especially to the lender.

The advantage to a lender in this transaction is avoiding the time (about four months) and expense (attorneys' fees, trustee's fees, publication costs, etc.) of a foreclosure. By accepting a DIL the lender can short circuit the statutory requirements of waiting at least 3 months and 20 days before a trustee's sale. Likewise, the lender can put the property on the market for resale much quicker, and it can avoid (hopefully) a bankruptcy filing at the last minute.

The benefit to the borrower is that he avoids the possibility of an action for a deficiency judgment if there is little or no equity in the property. In fact, the language of the DIL specifically says it is being given "in consideration of the full cancellation of all debts, obligations, costs and charges secured by that certain Deed of Trust" which is in foreclosure.

Here's the rub . . .

When a lender forecloses, it wipes out all junior deeds of trust and liens which were recorded after the foreclosing lender's deed of trust, and the lender gets clear title. If the lender accepts a deed in lieu of foreclosure, it takes title subject to all liens of record as of the new recording date. So, if a second deed of trust or a judgment or tax lien has been recorded after the recording date of the first deed of trust, the foreclosing lender will probably want to go through with the formal trustee's sale in order to clear title.

At a minimum, the lender will want to order a Foreclosure Guarantee policy from a title insurance company to assure that there are no junior liens and to protect the lender against any junior liens which might be recorded at the last moment.

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