Posted on: 10th Apr, 2004 03:58am
If you can't keep up with the monthly payments on your mortgage and want to stop a foreclosure on your home, you should consider going for a deed in lieu. To find out what deed in lieu is all about, and whether there's a better alternative, check out the topics below.
- What is a deed in lieu?
- How does deed in lieu work?
- What are the tax consequences?
- What are the other benefits of deed in lieu of foreclosure?
- Is loan modification better than deed in lieu?
What is a deed in lieu?
A deed in lieu of foreclosure is where you deed your property to the lender in exchange for being forgiven the entire amount of the mortgage. The lender then sells off the property in order to retrieve as much of the unpaid mortgage amount as they can.
How does a deed in lieu work?
If you choose to try for a deed in lieu in order to avoid foreclosure, you need to sign several legal documents such as the Agreement in Lieu of Foreclosure and a deed. The first document sets out the terms and conditions of the deed-in-lieu, and is signed by both the lender and borrower. The second document, which is the deed, conveys legal ownership of the property to the lender.
The lender marks the borrower's note as "paid" and provides the borrower with two documents - one which states that the debt is canceled and the other waives the lender's right to a deficiency judgment (the lender's right to ask for the amount of the debt they are unable to recover from the sale of the home).
This agreement is executed through an escrow company which receives the borrower's note (marked as "paid") from the lender. The escrow then records the deed in the property's file at the county recorder's office and sends the note to the borrower, releasing the borrower from all obligations under the mortgage.
The lender marks the borrower's note as "paid" and provides the borrower with two documents - one which states that the debt is canceled and the other waives the lender's right to a deficiency judgment (the lender's right to ask for the amount of the debt they are unable to recover from the sale of the home).
This agreement is executed through an escrow company which receives the borrower's note (marked as "paid") from the lender. The escrow then records the deed in the property's file at the county recorder's office and sends the note to the borrower, releasing the borrower from all obligations under the mortgage.
What are the tax consequences?
When you go for deed in lieu, you may have to pay 2 types of taxes. They are:
- Deed tax: Since this deed involves the transfer of property, the borrower may need to pay a state deed tax on conveyance of property to the lender. The deed tax is $1.65 if there is no consideration, or when consideration is $500 or less.
The tax is calculated on the difference between the fair market value of your property and your mortgage balance plus any liens removed from the property due to the deed in lieu. - Income tax on canceled debt: Under the Mortgage Debt Forgiveness Tax Relief Act (applicable till the end of 2012), you need not pay any income tax on canceled debt (unpaid loan balance which is forgiven by lender) resulting from a deed in lieu. However, a borrower will need to satisfy certain conditions for mortgage tax relief.
What are the other benefits of deed in lieu of foreclosure?
Other than the tax benefits, this mortgage process offers some other benefits to the borrowers as well as the lenders. Some of these benefits are-
- It helps you avoid foreclosure. Foreclosure has serious negative consequences on your finances. Again, lenders also try to avoid foreclosure as it is time-taking and very complicated too.
- Once the deed gets transferred through this legal process, there are no chances of your property going into sheriff sale. There are also no chances to initiate eviction process against you.
- Here the lender is bound to accept your property as payment in full. So, no deficiency judgment can be imposed upon you.
Is loan modification better than deed in lieu?
Mortgage loan modification is a better option than deed in lieu of foreclosure because it helps you keep your home. At the same time, you can save your credit scores from taking a big hit. That's because loan modification allows you to negotiate a lower interest rate and monthly payment on your mortgage.
If you have missed payments, they can be added to your principal balance and the term extended so that your monthly payments become affordable. So, loan modification is a better choice.
However, if you don't have sufficient income to meet your monthly payments, you won't be approved for loan modification. If this is the case, a deed in lieu may be your only choice to prevent foreclosure if your lender agrees.
If you have missed payments, they can be added to your principal balance and the term extended so that your monthly payments become affordable. So, loan modification is a better choice.
However, if you don't have sufficient income to meet your monthly payments, you won't be approved for loan modification. If this is the case, a deed in lieu may be your only choice to prevent foreclosure if your lender agrees.
when should you do a deed in lieu instead of foreclosure? On my foreclosure "all decrepencies are waived" would this be true with a deed in lieu?
I lost my job just after refinancing at 100% of my home value, with a 2-year pre-payment penalty. I was ready to go into foreclosure, as I found another job out of state. The bank offered a deed in lieu. Is there a down side to this? Ther are no other liens on the house. I cannot make payments.
Hi Art G,
Welcome to MortgageFit Forums.
I understand this is a tough decision to take. But since you have got a job now it is required that the matter is settled early.
Deed in lieu will leave some effects in your credit report but it favorable compared to a foreclosure. And you can rebuild credit after deed in lieu of foreclosure.
Since you got a job out of state so I think you will not want to lose much time. Also as per your statement you don't have the money to pay off currently.
In that case deed in lieu is a good option. You may go ahead with that, but be sure to check that you are relieved off all the liabilities.
God bless you.
For MortgageFit,
Samantha
Welcome to MortgageFit Forums.
I understand this is a tough decision to take. But since you have got a job now it is required that the matter is settled early.
Deed in lieu will leave some effects in your credit report but it favorable compared to a foreclosure. And you can rebuild credit after deed in lieu of foreclosure.
Since you got a job out of state so I think you will not want to lose much time. Also as per your statement you don't have the money to pay off currently.
In that case deed in lieu is a good option. You may go ahead with that, but be sure to check that you are relieved off all the liabilities.
God bless you.
For MortgageFit,
Samantha
my husband and I bought a house in Oct 2001. I was layed off in nov of 2001. Now my husband as lost his job and has found another one in a different state but it pays a lot less. The strain of paying both the mortgage and for an apatment for my husband is getting to be too much. We have had our house on the market since august with not even an offer. our real estate agent as told us of an option "deed in lieu of foreclosure". what does that mean? Does it apply to me? Is it a good option? what are the draw backs?
Hi Michelle,
Welcome to MortgageFit Forums.
I can understand the difficulties that you are facing in this situation. But time does not stay the same way and will change soon for you.
Your husband's condition will improve one day with caring wife like you to support him.
Through deed in lieu process, the borrower can transfer the ownership rights of the property to the lender to avoid foreclosure. It is suitable generally when the private sale of the property is not possible and when you do not want to spend more time in a foreclosure.
You can get rid of your mortgage which you don't want to keep now. I think it suits your situation. Involve an attorney in the matter so that you are assured of clearance from the mortgage through the deed.
Actually deed in lieu can prevent severe damages of your credit done by a foreclosure. So it can be a good option for you under this condition.
Time will improve Michelle for both of you. I strongly believe that. I have seen people in similar situations come out of the trouble soon.
Feel free to ask us if you have any more doubts.
God bless you.
For MortgageFit,
Samantha
Welcome to MortgageFit Forums.
I can understand the difficulties that you are facing in this situation. But time does not stay the same way and will change soon for you.
Your husband's condition will improve one day with caring wife like you to support him.
Through deed in lieu process, the borrower can transfer the ownership rights of the property to the lender to avoid foreclosure. It is suitable generally when the private sale of the property is not possible and when you do not want to spend more time in a foreclosure.
You can get rid of your mortgage which you don't want to keep now. I think it suits your situation. Involve an attorney in the matter so that you are assured of clearance from the mortgage through the deed.
Actually deed in lieu can prevent severe damages of your credit done by a foreclosure. So it can be a good option for you under this condition.
Time will improve Michelle for both of you. I strongly believe that. I have seen people in similar situations come out of the trouble soon.
Feel free to ask us if you have any more doubts.
God bless you.
For MortgageFit,
Samantha
In a joint ownership if one or the other party is unable to pay its half can a Deed In Leiu still be used.
Hi,
As far as I have heard, if one party cannot pay its half, then the deed-in-lieu of foreclosure can be applied only on his interest on the property.
Thanks,
Jerry.
As far as I have heard, if one party cannot pay its half, then the deed-in-lieu of foreclosure can be applied only on his interest on the property.
Thanks,
Jerry.
Hi
My house was for sale and under contract and the person backed out. I know have to homes I have been making the payments is this an option for me. It is getting very hard to make the payments. How bad how does a deed in lieu of foreclosure affect credit?
[E-mail edited by Jessica, as per forum rules. Thanks.]
My house was for sale and under contract and the person backed out. I know have to homes I have been making the payments is this an option for me. It is getting very hard to make the payments. How bad how does a deed in lieu of foreclosure affect credit?
[E-mail edited by Jessica, as per forum rules. Thanks.]
Yep, sometimes they backed out.
Sell at FSBO you will sell faster and there most likely you will get more competitive price as paying big commissions to the agents can be bypassed. These agents care more about their fast money not their client.
But they have to refund the buyer's earnest deposit, though some legal actions can be taken against them but rarely are the buyer's going to tie up their lives to pursue a lawsuit.
Niicss
Sell at FSBO you will sell faster and there most likely you will get more competitive price as paying big commissions to the agents can be bypassed. These agents care more about their fast money not their client.
But they have to refund the buyer's earnest deposit, though some legal actions can be taken against them but rarely are the buyer's going to tie up their lives to pursue a lawsuit.
Niicss
Hi Peggy,
If you want to sell it on your own then FSBO is a good option as stated by Niicss. But sometimes it becomes difficult to sell if you are not a professional. So, taking a professional can take away headache out of you.
But be assured to choose the right agent to escape harassment. Consult with your friends and neighbors for recommendations. Shop around to pick up the most suitable one amongst the many available.
A proper agent will help you to establish a fair price for your home. He will help you negotiate with the buyers and guide you to sell without much trouble.
If you are wind up with two mortgages on two homes, you can opt for a bridge loan to make the double payments, although you need to be aware of the rates that is offered and should shop around for the best rate.
So far you making regular payments on your mortgages, your credit record is not going to be affected, but in case of any failure it is definitely going to have a negative impact.
Thanks,
Murphy
If you want to sell it on your own then FSBO is a good option as stated by Niicss. But sometimes it becomes difficult to sell if you are not a professional. So, taking a professional can take away headache out of you.
But be assured to choose the right agent to escape harassment. Consult with your friends and neighbors for recommendations. Shop around to pick up the most suitable one amongst the many available.
A proper agent will help you to establish a fair price for your home. He will help you negotiate with the buyers and guide you to sell without much trouble.
If you are wind up with two mortgages on two homes, you can opt for a bridge loan to make the double payments, although you need to be aware of the rates that is offered and should shop around for the best rate.
So far you making regular payments on your mortgages, your credit record is not going to be affected, but in case of any failure it is definitely going to have a negative impact.
Thanks,
Murphy
if the bank agrees to a deed and lieu they are telling that its over they take back the house and dont come back to me for the difference is that true?? also what if the house was sold before or after the deed and lieu do i have to pay the difference? Where can I get a deed in lieu of foreclosure form?
Hi Mike,
Welcome to MortgageFit Forums.
Paying the difference between the sale price and the mortgage will depend on the negations you have had with the bank. Sometimes banks and lenders do allow this. This is known as short sale.
So if your bank has agreed to a deed in lieu and then they get a sale price much lower than the unpaid loan balance, they do have th right to charge the remaining mortgage payments. But yes, if you can negotiate with them tactfully, then you may be allowed to get away with the balance.
Often a short sale can be more complicated if the loan has been sold in the secondary market. Because then the lender needs to take permission from Freddie-Mac, one of the two major secondary market players.
Thanks,
Caron
Welcome to MortgageFit Forums.
Paying the difference between the sale price and the mortgage will depend on the negations you have had with the bank. Sometimes banks and lenders do allow this. This is known as short sale.
So if your bank has agreed to a deed in lieu and then they get a sale price much lower than the unpaid loan balance, they do have th right to charge the remaining mortgage payments. But yes, if you can negotiate with them tactfully, then you may be allowed to get away with the balance.
Often a short sale can be more complicated if the loan has been sold in the secondary market. Because then the lender needs to take permission from Freddie-Mac, one of the two major secondary market players.
Thanks,
Caron
Is a deed in lieu less negative than a foreclosure in Michigan, and how long does it take for a foreclosure. We have had money problems and can't catch up the mortgage payments and a foreclosure is close. We just are soooo tired of the hassle and won't some peace of mind. What do we do? Which road do we take?
Hi Guest,
I can understand what you are going through and that too when the celebrations of the New Year are still on. But do not worry. I can assure you that you will be able to get out of this situation; the only thing is that it will take some time till you can come out of it.
Regarding the deed-in-lieu, I would say that in general a foreclosure has a more negative impact than a deed-in-lieu. This is because in the deed-in-lieu, you are giving up all your interest in the property to free yourself from the obligation of paying off the mortgage.
In Michigan, generally judicial foreclosure is conducted and the process takes about 147 days. But I would suggest that instead of foreclosure, you better go for a deed-in-lieu. This will save your credit report from being damaged to that extent as in a foreclosure.
But before you proceed, you should definitely consult a mortgage attorney to guide you further.
Hope that you get over this problem soon and enjoy the New Year.
Regards,
Caron.
I can understand what you are going through and that too when the celebrations of the New Year are still on. But do not worry. I can assure you that you will be able to get out of this situation; the only thing is that it will take some time till you can come out of it.
Regarding the deed-in-lieu, I would say that in general a foreclosure has a more negative impact than a deed-in-lieu. This is because in the deed-in-lieu, you are giving up all your interest in the property to free yourself from the obligation of paying off the mortgage.
In Michigan, generally judicial foreclosure is conducted and the process takes about 147 days. But I would suggest that instead of foreclosure, you better go for a deed-in-lieu. This will save your credit report from being damaged to that extent as in a foreclosure.
But before you proceed, you should definitely consult a mortgage attorney to guide you further.
Hope that you get over this problem soon and enjoy the New Year.
Regards,
Caron.
My husband and I have had our home on the market for almost 2 years w/our current agent and a year with one prior to him. We had it near sold two separate time but both backed out at the last minute. In that time I had lost my job. We have stayed current on our payments until this month. We do not have the money to make our payment. I have been in contact with our lender since July of last year to keep them up-to-date on our situation and it's near impossible to get straight answers. We do have good credit but have fallen vicitm to some very difficult times. We want to be rid of this house. We have run ads and have had open houses our selves (with an agreement from our realtor) and this things just isn't selling. Can you give me specific details on how to go about the Deed in Lieu. We want to get this taken care of ASAP and done the right way. Should we look to a lawyer to make the calls? Thank you for your time.
Sincerely,
Jenny K.
Sincerely,
Jenny K.