Deed in lieu of foreclosure

Key Takeaways

• A deed in lieu of foreclosure is a voluntary transfer of title from a defaulting borrower to the lender, given to satisfy the debt instead of running a forced sale.
• The lender has to agree to accept it, so a deed in lieu is a negotiated resolution and not something a borrower can do alone.
• RCW 61.24.031 names a deed in lieu of foreclosure as one resolution a Washington beneficiary and borrower may reach before foreclosure, alongside a loan modification and a short sale.
• RCW 64.06.010(1) exempts a transfer by deed in lieu of foreclosure from the seller disclosure statement requirement.

What It Means

A deed in lieu of foreclosure is a voluntary transfer of title from a borrower in default to the lender, given to satisfy the debt without a forced sale. The borrower signs a deed conveying the property, the lender accepts it, and the loan is resolved on whatever terms the two of them put in writing. None of that is automatic. The lender has to agree, and it studies what else is recorded against the title before it does.

Borrowers and lenders reach for a deed in lieu for the same reason they reach for a Short Sale or a loan modification. Foreclosing a Deed Of Trust costs money and takes months, and at the end of it the lender usually owns the property anyway. A voluntary transfer skips ahead to that result and saves both sides the expense. Our guide to short sales in Washington covers the same negotiation from the listing side.

One caution belongs on every student's list. A deed in lieu does not by itself erase every obligation the borrower took on. Whether anything is still owed after the transfer depends on the release language the parties wrote into the agreement, which is why that paragraph is the one to read twice.

How It Works in Washington

Washington law treats a deed in lieu as one of the recognized ways out of a defaulted loan. RCW 61.24.031, which sets the beneficiary's duties before a notice of default, says a resolution may include, but is not limited to, a loan modification, an agreement to conduct a short sale, or a deed in lieu of foreclosure transaction, or some other workout plan. That is the same menu of pre-foreclosure options the course teaches.

Two Washington consequences follow the transfer itself. RCW 64.06.010(1) exempts a foreclosure or deed in lieu of foreclosure from the seller disclosure chapter, so the borrower delivers no Form 17 on that conveyance. WAC 458-61A-208(6)(a) provides that the real estate excise tax does not apply to a transfer by deed in lieu of foreclosure to satisfy a mortgage or deed of trust where no additional consideration passes, so a clean deed in lieu ordinarily carries no Real Estate Excise Tax Reet.

The deficiency question is where students get burned. RCW 61.24.100(1) bars a deficiency judgment on the obligations secured by a deed of trust after a trustee's sale under that deed of trust. A deed in lieu is not a trustee's sale, so that subsection is not what protects the borrower here. On commercial loans RCW 61.24.100(7) does speak to it directly: a beneficiary's acceptance of a deed in lieu exonerates the guarantor from liability for the secured debt except to the extent the guarantor otherwise agrees as part of the deed in lieu transaction. Everywhere else, the protection is the written release.

Example

Marisol owes $312,000 on a deed of trust secured by her Spokane house. She lost her job in March, missed four payments, and a broker's price opinion puts the property at $268,000, so a sale would leave the lender $44,000 short. She calls the servicer before any notice of default is recorded and asks whether it will take a deed in lieu.

The servicer runs title, finds no junior liens, and agrees. Marisol signs a deed conveying the house to the lender, and the written agreement states that the lender takes the property in full satisfaction of the note and releases her from the $44,000 shortfall. Because nothing passes beyond satisfaction of the debt, the transfer is the kind WAC 458-61A-208(6)(a) describes as exempt from real estate excise tax, and she delivers no seller disclosure statement because RCW 64.06.010(1) exempts a deed in lieu transfer. Had the agreement said nothing about the $44,000, she would have handed over the house without a written release, and RCW 61.24.100(1) would not have covered her, because no trustee's sale ever took place.

Common Mistakes and Exam Traps

• A deed in lieu and a short sale are different exits. In a short sale the property is sold to a third party for less than the balance with the lender's approval. In a deed in lieu, title goes to the lender and there is no third-party buyer.
• The bar on deficiency judgments in RCW 61.24.100(1) applies after a trustee's sale under the deed of trust. A deed in lieu is not a trustee's sale, so a borrower's release from any remaining balance comes from the written agreement.
• A deed in lieu requires the lender's agreement. A question describing a borrower who simply signs a deed and mails it to the lender is not describing a completed deed in lieu.
• The seller disclosure exemption in RCW 64.06.010(1) covers the deed in lieu transfer itself. It is not a blanket exemption attached to the property for every sale that follows.