If you’re asking, “can I give my house back to the bank?,” you are likely facing a stressful and challenging financial situation. The pressure of mortgage payments you can no longer afford can be overwhelming. The short answer is yes, it is possible to voluntarily give your property back to the lender, but it’s not as simple as handing over the keys. This process has specific legal names, procedures, and significant consequences for your financial future.
This guide will walk you through your primary options, such as a Deed in Lieu of Foreclosure and a Short Sale, compare them to foreclosure, and explore other alternatives. Understanding these choices is the first step toward finding the best possible path forward for your circumstances.
The “Give Back” Process: More Than Just Walking Away
You cannot simply “give back” your house and walk away without consequence. A mortgage is a legally binding contract. When you voluntarily surrender your home, you are essentially telling the bank you cannot meet your obligations and are seeking a way to resolve the debt. The two most common ways to do this are a Deed in Lieu of Foreclosure and a Short Sale.
The Primary Option: Deed in Lieu of Foreclosure
This is the closest legal process to “giving the house back.” It is a formal arrangement where you voluntarily transfer the ownership and title of your property to the bank, and in return, the bank agrees to release you from your mortgage obligation.
What is a Deed in Lieu of Foreclosure?
With a Deed in Lieu of Foreclosure, you sign a document that hands the property title directly to the lender. This allows the bank to avoid the lengthy and expensive legal process of foreclosure. In exchange, the bank cancels your remaining mortgage debt. However, the bank is not obligated to accept your offer.
Pros and Cons of a Deed in Lieu
Pros:
- Avoids Foreclosure: It keeps a formal foreclosure off your public record.
- Faster Process: It is generally quicker and less complicated than a foreclosure.
- Less Damage to Credit (Potentially): While it still significantly harms your credit score, the impact is often viewed as slightly less severe than a foreclosure.
- Privacy: The process is a private transaction between you and the bank, unlike a public foreclosure auction.
Cons:
- Bank Approval Needed: The bank can refuse your request, especially if there are other liens (like a second mortgage or tax liens) on the property.
- Significant Credit Impact: Your credit score will still take a major hit, making it difficult to secure new loans for several years.
- Potential Tax Consequences: If the bank forgives a portion of your debt, the IRS may consider that forgiven amount as taxable income. You should consult a tax advisor.
- You Lose the Home: You will lose your property and any equity you may have built.
Another Key Alternative: The Short Sale
A short sale is another way to avoid foreclosure if you owe more on your mortgage than the home is currently worth (this is known as being “underwater”).
What is a Short Sale?
In a Short Sale, the bank agrees to let you sell the property for less than the total amount you owe on the mortgage. You find a buyer, and the bank accepts the sale proceeds as a settlement of the debt, even though it’s “short” of the full amount.
When is a Short Sale a Good Option?
A short sale is often pursued when a deed in lieu isn’t possible or desirable. It requires you to actively participate in selling your home. The bank must approve the final sale price and buyer, which can be a lengthy and uncertain process. Like a deed in lieu, it negatively impacts your credit but is generally considered a better outcome than foreclosure.
Comparing Your Options: Deed in Lieu vs. Short Sale vs. Foreclosure
| Feature | Deed in Lieu of Foreclosure | Short Sale | Foreclosure |
| Process | Voluntarily sign over the title to the bank. | You sell the home for less than you owe, with bank approval. | Bank legally seizes and sells your home due to non-payment. |
| Credit Impact | Severe negative impact. | Severe negative impact. | Most severe negative impact. |
| Public Record | No public foreclosure record. | No public foreclosure record. | Publicly recorded event. |
| Deficiency | Often forgiven by the bank. | May be forgiven, but the bank could pursue you for the difference. | Bank can often sue for the remaining balance (deficiency judgment). |
| Timeline | Relatively quick (a few months). | Can be very long (6-12 months or more). | Long and drawn-out legal process. |
Other Alternatives to Explore Before Giving Up Your Home
Before deciding to give your house back, it is crucial to contact your lender and explore other options. Lenders often prefer to find a solution rather than take back a property.
Loan Modification
A loan modification permanently changes the original terms of your mortgage. This could involve lowering your interest rate, extending the loan term, or even reducing the principal balance to make your monthly payments more affordable. To learn more, check out our Guide to Mortgage Modifications.
Forbearance
Forbearance is a temporary solution where your lender agrees to reduce or pause your mortgage payments for a specific period. This is designed for short-term financial setbacks, giving you time to get back on your feet. The missed payments must eventually be paid back.
The Impact on Your Credit and Financial Future
Make no mistake: a deed in lieu or a short sale will seriously damage your credit score. A drop of 85 to 160 points is common. This negative mark will stay on your credit report for seven years. It will make it very challenging to qualify for another mortgage, car loan, or even credit cards for a significant period.
However, rebuilding is possible. For tips on recovery, see our article on improving your credit after a financial hardship.
Frequently Asked Questions (FAQ)
1. How badly will giving my house back hurt my credit? It will have a severe negative impact, often dropping your score by over 100 points and staying on your report for seven years. While slightly better than a foreclosure, it is still a major negative event.
2. Can the bank refuse a deed in lieu of foreclosure? Yes. If the property has other liens or if the bank believes it can recover more money through foreclosure, it may reject your offer. The property must typically be in good condition.
3. Will I owe money after a deed in lieu or short sale? This depends on the agreement and state law. In many deed in lieu agreements, the bank forgives the remaining debt. In a short sale, they might issue a “deficiency waiver.” It is critical to get this in writing. Otherwise, the bank could potentially sue you for the difference.
4. How long does the process take? A deed in lieu can take 90-120 days. A short sale is often much longer, sometimes taking up to a year because it involves finding a buyer and getting bank approval.
Disclaimer
This article is for informational and educational purposes only and does not constitute financial or legal advice. The information provided is intended to help you understand your options but is not a substitute for professional guidance. Your financial situation is unique, and the laws regarding mortgage debt, deficiency judgments, and taxes vary by state. We strongly recommend that you speak directly with your lender, a HUD-approved housing counselor, and a qualified financial advisor or attorney to review your specific circumstances and make the most informed decision.
