If you ask anyone what comes to mind when they hear the word “foreclosure”, they would certainly not describe it as “friendly”. A deed in lieu transaction is what is commonly referred to as the friendly foreclosure because it is often less damaging to the homeowner than a traditional foreclosure.
A deed in lieu is essentially a voluntary foreclosure, in which the borrower does not contest the foreclosure proceedings. Instead, the homeowner agrees to voluntarily relinquish the property to the lender in exchange for being relieved of liability over the debt. In this type of transaction, the borrower signs over the title of the property back to the loan holder, giving the lender the responsibility over the property and its debt.
The benefit to this type of friendly foreclosure is that is a quick solution to the foreclosure problem when time is of the essence. In some cases, a short sale or other mortgage debt option isn’t pursuable and time is running out on the foreclosure clock. Although a deed in lieu transaction may show up as a foreclosure on the borrower’s credit report, it is often accompanied by a notation that the transaction was both voluntary and the debt liability was removed.