Law of a Deed in Lieu of Foreclosure in Texas

Texas Law Overview

Texas law does not allow for the right of redemption, which provides homeowners the opportunity to purchase their home after a foreclosure auction. Texas does, however, allow for equity of redemption. Equity of redemption gives homeowners the right to come up with the money to purchase their home after default and before the foreclosure auction. Because equity of redemption gives homeonwers less time to refinance, it's not as favorable to distressed homeowners as a right of redemption.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure (DILF) is a process by which a distressed homeowner deeds his home to his lender; the lender agrees to forgive the remainder of the homeowner's debt. The result is the lender then owns the house outright, the homeowner no longer owns the home and his name is removed from the deed. Typically, the more equity the homeowner has in the home, the more likely the lender is to agree to a DILF.

Advantages

DILFs are attractive to homeowners in default for many reasons. The DILF process is relatively quick and inexpensive. Generally, the only costs involved are fees to record the deed and the cost of drawing up the deed. Additionally, DILFs are not publicized like foreclosure sales are. As such, homeowners are spared the publicity that typically goes along with a foreclosure. Lastly, there is no negative impact on the homeowner's credit score, whereas a foreclosure has a drastically negative effect.

Disadvantages

Depending on the lender and the amount of equity in the home, it can be difficult to persuade a lender to agree to a DILF. The other disadvantage is that a homeowner who does obtain a DILF loses all equity in his home. This is different than foreclosure in that, after a foreclosure sale, if the home sells for more than the homeowner's remaining mortgage debt, the homeowners receives the proceeds.