For home borrowers ("mortgagors") facing foreclosure, a deed in lieu of foreclosure provides an alternative solution to the standard default process. In particular, the deed grants the lender (the "mortgagee") full rights to the property title to satisfy the conditions of the loan. Such agreements are a common form of mortgage contract settlement. In general, a deed is a right granted by a legal contract based upon mutual agreement; therefore, a deed-in-lieu must be based upon voluntary agreement knon as a "quitclaim deed" in good faith.

In cases where a borrower lacks sufficient assets for a deficiency judgment, the lender will often pursue a deed settlement independent of court proceedings. Under certain conditions, a deed in lieu of foreclosure can offer several advantages to the borrower and lender alike. If agreed to by both parties, the lender is then able to assume ownership of the property, creating a more efficient process by limiting court costs and waiting periods involved in standard foreclosure processes. Standard foreclosure procedures can take years to court and are further complicated by personal bankruptcy declarations, which can be relatively common in such cases. For a borrower facing foreclosure, the deed agreement can relinquish him or her from underlying debt, thus removing the foreclosure record from a credit record and reducing the need for a declaration of personal bankruptcy. Lenders also benefit in terms of improved settlement efficiency, which greatly reduces the time, cost and potential complications that would otherwise be involved in a repossession procedure.

In order for the agreement to be reached, the appraised market value of the property must be less than the outstanding debt from the original agreement, and the property must not be subject to any 3rd party creditor claims or liens. Deeds-in-lieu are often initiated either by personal financial difficulties on the part of the borrower or changes in the macroeconomic environment that shift interest rates and/or underlying home values. Mortgage contracts that rely upon a relatively high monthly payment based upon a variable interest rate (with a limited, initial down payment) are particularly vulnerable to shifts in the economic environment; an interest rate change of just a few percentage points could double a borrower's monthly payment, under certain circumstances. The recent housing market challenges have reflected a coalescence of these factors, which have made deeds-in-lieu a common instrument for borrowers facing foreclosure.

Technically, to proceed with a deed-in-lieu both parties must agree to and sign both an Agreement in Lieu of Foreclosure, which outlines the terms of the deed, as well as the deed itself, which transfers legal ownership of the property. In certain situations, a borrower may pay to reduce the debt to ensure they maintain their credit rating. Once the agreements are reached, the lender then classifies the original loan as paid and issues a waiver to deficiency judgment, which would normally go into effect in case sale of the property results in an amount less than the debt. A third party escrow service then executes the agreement, thus releasing both parties from their original contract.