Sometimes a borrower who pledges collateral for a mortgage loan cannot meet the loan repayment obligation. Unless the parties reach another agreement, the lender will often foreclose on the collateral in an effort to satisfy the loan and may sometimes pursue additional legal action against the debtor for any deficiency that remains after the foreclosure sale.
One agreement to avoid a foreclosure is a short sale.
Acceptance of a deed in lieu of foreclosure is another alternative to legal foreclosure. Under this scenario, a lender accepts the deed to the collateral securing the loan (the mortgaged property) in full satisfaction of the underlying debt.
A deed in lieu of foreclosure arrangement theoretically allows both lender and borrower to avoid additional expenses, public exposure, and other intentional and unintentional consequences of foreclosure proceedings.
In our Law 101 posts, we define terms, phrases, or concepts with the goal of conveying core information in order to set the stage for more complex discussions.