 TITLE: What Does Deed in Lieu of Foreclosure Mean? CONTENT: Downsides of Deeds in Lieu of Foreclosure\n-----------------------------------------\nUnderstand that your lender is under no obligation to offer a deed in lieu of foreclosure and that some mortgages under certain servicing agreements may not be eligible for such an arrangement. If there's a significant shortfall between the amount owed on the loan and the value of the property, the lender may require you to pay additional money to reduce its loss.\nObviously, the better shape the home is in, the more likely it is that you'll be able to arrange a deed in lieu. And if there is a second or even a third mortgage on the home, including a home equity loan or home equity line of credit, the other, subordinate lenders will need to release their liens and sign off on the arrangement. If the primary mortgage lender is eager to take possession of the property, the lender may offer to pay the other lien holders to arrange a deal. But those additional loans against the home will complicate getting a deed in lieu.\nOne downside to a deed in lieu is that you may face taxes on the amount of your forgiven debt, which the IRS considers income. The taxable amount is the total debt at the time it was forgiven minus the fair market value of the home at that time. For example, if the outstanding mortgage debt at the time of the deed in lieu arrangement was $180,000 and the market value of the property was $150,000, the homeowner could owe tax on $30,000. END