Homeowners who struggle to make ends meet sometimes find themselves faced with the possibility of foreclosure. Fortunately, there are some alternatives to actual foreclosure. One such alternative is a deed-in-lieu of foreclosure (DIL). A DIL is a way to give your unaffordable home to your mortgage lender to avoid foreclosure altogether. But deeds-in-lieu of foreclosure do come with a few potential penalties that are important to be aware of. One potential downside is that a DIL might lead to a negative mortgage balance that a lender might attempt to collect.

Negative Balance Issues

Because lenders prefer money from their borrowers, not their homes, lenders typically dislike deeds-in-lieu of foreclosure. A lender might also turn around and sell the home attached to the DIL at a loss.  And you may be liable for that balance, sometimes running into the thousands of dollars, unless you get your lender’s written waiver of negative balance resulting from the DIL.

Post-DIL Credit

It’s important to know a deed-in-lieu of foreclosure is going to affect your credit, especially if a negative mortgage balance results and the credit penalty attached to a DIL could increase your credit costs for several years following the DIL.

Home Loss Penalty

You maybe have to immediately vacate when you give your lender your home’s deed to avoid foreclosure. But some lenders do have “lease for deed’ programs.” Because some lenders don’t want DIL homes sitting vacant until they’re sold they may allow you to temporarily lease yours after the DIL.

Federally Sponsored DILs

It’s important to determine who really owns your mortgage if you’re considering approaching your lender about a DIL. Roughly 60 percent of mortgages in the United States are actually owned by Fannie Mae or Freddie Mac. These two mortgage giants are able to offer homeowners who are eligible some helpful DIL options via the government’s Home Affordable Foreclosure Alternatives (HAFA) program. Eligible homeowners who use HAFA might be able toreceive relocation assistance from Fannie and Freddie mortgage servicers, including cash payments up to $3,000.