A deed in lieu of foreclosure is basically a voluntary foreclosure, where the homeowner agrees to surrender the property to the bank, and the bank, in exchange for not having to incur the legal expenses of going through the foreclosure process, in some cases agrees to not pursue any deficiency against the seller.

In past real estate downturns, banks were willing to take properties back in a deed in lieu of foreclosure. Today, however, most banks are not interested in doing deeds in lieu of foreclosure because they are already overwhelmed with foreclosed properties and do not want to take any more properties back.

For this reason, typically, when a seller calls their lender to request a deed in lieu, they are told that the bank does not want it, and to short sale the property.

The other major obstacle in most cases to a deed in lieu is that there can only be one loan on the property. If a homeowner has a first and a second lien on the property, they cannot do a deed in lieu of foreclosure.

Finally, a deed in lieu shows up as a foreclosure on a borrowers credit report.