Definition
A deed in lieu of foreclosure is when a homeowner voluntarily signs the property over to the lender to settle the debt instead of going through a full foreclosure. Lenders typically only accept this option in narrow circumstances, usually when there are no other liens on the property and little or no equity remaining. From a homeowner's perspective, it can be somewhat gentler on your credit and faster than a drawn-out foreclosure, but you still give up the house entirely, along with any equity that might exist. Because of that, it's almost always worth getting a real sale offer first to compare, since even a modest amount of equity is better captured through an actual sale than surrendered through a deed in lieu.
Example
Facing foreclosure with almost no equity left in her home, Carol initially considered a deed in lieu because it seemed like the quickest way out of a stressful situation. Her lender had even mailed her the paperwork already, and she nearly signed it without exploring anything else. Before signing anything, she called a cash buyer for a second opinion and got a real offer on the house. Once payoff costs, closing fees, and back payments were factored in, she discovered she could still net about $9,000 from an actual sale rather than walking away with nothing. Rather than sign the deed back over to the bank for zero dollars, Carol sold the house outright through a normal closing and kept the proceeds for herself. She used part of that money as a security deposit on her next rental.