If you are behind on the mortgage and cannot catch up, you have three ways out that end with you no longer owning the house: sell it yourself, sell it for less than you owe with the lender’s permission, or give it back. A deed in lieu of foreclosure is the third one. You sign the deed over to the lender, and in exchange the lender agrees not to foreclose. The Consumer Financial Protection Bureau describes it as voluntarily turning over ownership to avoid the foreclosure process.
Three facts decide whether it is the right route in Massachusetts. First, a deed in lieu gives away any equity you have, so if the house is worth more than you owe, selling almost always leaves you better off. Second, the lender usually needs clear title, so a second mortgage, a home equity line or a judgment lien can stop it. Third, forgiven mortgage debt on a main home is generally no longer excluded from federal income for discharges after 31 December 2025, which changes the math for anyone short on value.
This is general information, not legal or tax advice. Before you sign anything, talk to a HUD-approved housing counselor, a Massachusetts real estate attorney and a tax professional.
The four routes side by side
Most owners in this position are choosing among a normal sale, a short sale, a deed in lieu of foreclosure, or letting the foreclosure run. The table compares them on the points that usually matter most.
| Sell it yourself | Short sale | Deed in lieu | Foreclosure | |
|---|---|---|---|---|
| Who controls the sale | You | You, with lender approval | The lender | The lender |
| Your equity | You keep what is left after payoff | None, the lender takes a loss | Usually none | Any surplus after the sale, if one exists |
| Lender approval needed | No, only a payoff | Yes, for price and buyer | Yes, for the whole deal | No |
| Other liens | Paid from proceeds | Every lienholder must agree | Usually must be cleared first | Junior liens are generally cut off, though the debts behind them can survive |
| Remaining balance | None if the sale covers it | Depends on the approval letter | Depends on the agreement | Lender can often sue for it |
| Forgiven debt and tax | None | Possible | Possible | Possible |
The table hides one important point: these routes are not equally available at every stage. A sale needs time on the market or a buyer who can close quickly. A short sale needs lender approval, which can take a while. A deed in lieu needs the lender to agree to take the house at all. Foreclosure only needs you to do nothing.
Selling the house yourself
If you have equity, selling is the route to beat. You pay off the mortgage in full from the proceeds, keep what is left, and there is no forgiven debt to report and no deficiency to worry about. Massachusetts law protects this option. Under chapter 244, section 35A, the 90-day right to cure notice on a principal residence must tell you that you may sell the property before the foreclosure sale and use the proceeds to pay off the mortgage. Our guide to what a Massachusetts notice of right to cure means walks through that letter line by line.
The catch is time and condition. A listed sale that needs repairs, showings and a buyer’s mortgage approval can run past an auction date. That is where a cash buyer can fit. Once title is checked and clear, we usually close in 2 to 4 weeks from a signed agreement, and we do not promise a date before the title work is done. Our offers typically land at 60 to 70 percent of what the house would be worth after renovation, so a cash sale is the fast route, not the top-dollar route. If you want a figure to compare against, you can request a cash offer on your Massachusetts house and set it beside an agent’s pricing opinion.
Short sale
If you owe more than the house will bring, a short sale lets you still sell on the open market while the lender accepts less than the full payoff. It keeps you in control of the price and the buyer, which a deed in lieu does not. The costs are time, paperwork and uncertainty, and every lienholder has to agree, including a second mortgage. Whether the remaining balance is forgiven or preserved depends on the lender’s written approval. Our piece on selling your house for less than you owe in Massachusetts covers the short sale arithmetic in detail.
Deed in lieu of foreclosure
In a deed in lieu, the lender takes the house back by agreement. The Massachusetts Attorney General’s Office groups it with short sales as a liquidation option: you avoid foreclosure, but you do not keep the property. The AG’s guide to preventing foreclosure warns that both routes may still leave you owing money or carry serious tax consequences.
When a lender will say yes
Lenders are not required to accept a deed in lieu, and they tend to be selective. Most want to see a genuine hardship, and many want the house marketed first so they know a sale is not realistic. The requirement that stops the most deals is title. Freddie Mac’s standard deed-in-lieu program, for example, requires the borrower to be able to convey clear and marketable title. A lender taking a house back does not want to inherit a second mortgage, a contractor’s lien or an unpaid tax bill behind it.
That is where many owners get caught out. In the deals we see, the most common title surprise is an old lien or mortgage everyone assumed was gone, and sellers are often genuinely shocked to find it. If you are considering a deed in lieu, order a title search early. A junior lien you did not know about can turn a deed in lieu into a dead end months into the process.
What you might get in return
Some programs offer relocation money to borrowers who leave the house in good condition and on schedule. Freddie Mac’s program, for example, advertises up to $7,500 in relocation assistance for homeowners who meet its requirements. That is a program feature, not a guarantee, and other lenders and investors set their own terms.
The two questions to settle in writing
First, does the agreement release you from the whole debt? The CFPB suggests asking for a written deficiency waiver, and making sure the agreement covers the entire amount owed on the mortgage. Second, what happens on tax? Those two answers matter more than how quickly the lender can take the keys.
Letting it go to foreclosure
Doing nothing is also a route, and it is usually the most expensive one. In Massachusetts a lender can generally sue for the deficiency after a foreclosure sale, provided it mailed you a written notice of intent to foreclose with a warning of deficiency liability, by registered mail, at least 21 days before the sale under chapter 244, section 17B. A foreclosure auction also tends to bring a lower price than an open-market sale, which can make any deficiency larger.
How does a deed in lieu of foreclosure affect taxes?
It can create taxable income. The IRS generally treats a foreclosure or similar transfer of property to a lender as a sale, and any debt the lender forgives beyond what the property covers can count as ordinary income, often reported on a Form 1099-C. According to IRS Publication 4681, qualified principal residence indebtedness can no longer be excluded for discharges completed, or discharge agreements entered into, after 31 December 2025. Exclusions for bankruptcy and insolvency still exist. Whether any of them applies to you is a question for a tax professional, and it is worth asking before you sign, not after the 1099-C arrives.
How to choose
Start with one number: a realistic sale price compared with a written payoff statement, plus every other lien. If there is equity after selling costs, a deed in lieu of foreclosure hands that equity to the lender, and selling is almost always the better choice. If there is no equity and the gap is small, covering it yourself or a short sale usually beats giving the house back. A deed in lieu makes most sense when you owe well more than the house is worth, title is clean, the lender will waive the balance in writing, and you would rather hand over the keys than manage a sale.
About 15 percent of the owners who contact us are behind on payments or under financial pressure, and many of them have already tried one plan that did not work. The pattern we see is that the ones with the most options acted before an auction date was set. A free HUD-approved counselor is the right first call, and HUD keeps a searchable list of approved housing counselors on its website. Then bring in a Massachusetts real estate attorney before signing any deed in lieu, short sale approval or settlement.
Homeowners We’ve Helped
Boston Investors
-
After 94 days on the market, two buyers backed out over the roof and septic. We were tired of dealing with it. The cash offer came without asking us to make the repairs, and we closed in 21 days. Once we looked at the actual numbers, it made much more sense than continuing to list. The whole process was simple and we’re very happy with how it worked out.
