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?
Hi Jenny,
Welcome to MortgageFit Forums.
This is a tough time you arte going through and I feel sorry for that but I strongly believe that you are going to come out of the situation soon.
Going through the details you provided, I don't think you will face much problem with the deed in lieu as you are current on your mortgage. So, you are in good view of the lender.
You need to talk to your lender as his acceptance is required in the process foe deed in lieu.
He is going to give you the process details and also may suggest if there is any alternative way possible.
It is better to involve an attorney in the process to be safe.
Feel free to ask if you have any more doubts. We shall be happy to help you and stand in support of you.
God bless you.
For MortgageFit,
Samantha
Welcome to MortgageFit Forums.
This is a tough time you arte going through and I feel sorry for that but I strongly believe that you are going to come out of the situation soon.
Going through the details you provided, I don't think you will face much problem with the deed in lieu as you are current on your mortgage. So, you are in good view of the lender.
You need to talk to your lender as his acceptance is required in the process foe deed in lieu.
He is going to give you the process details and also may suggest if there is any alternative way possible.
It is better to involve an attorney in the process to be safe.
Feel free to ask if you have any more doubts. We shall be happy to help you and stand in support of you.
God bless you.
For MortgageFit,
Samantha
We are in the middle of filling for bankruptcy. I was just told of a died in lieu. What would be better. What is better for for our credit when looking for a loan later. Thank you, God bless.
hi william,
bankruptcy has serious negative effects on your credit history and score.
a deed-in-lieu requires some condition to be fulfilled and requires the lender's acceptance. they have already discussed under this thread.
deed-in-lieu is preferable only if you have a place to stay. both will have negative effects on your score but the effect of bankruptcy may be more.
chapter 13 bankruptcy and deed-in-lieu both stays on your credit report for 7 years and chapter 10 stays for 10 years.
may be deed-in-lieu look slightly better in terms of getting a loan in future but lenders more often doesn't accept a deed-in-lieu due to title issues or the presence of other loans against the property.
james
bankruptcy has serious negative effects on your credit history and score.
a deed-in-lieu requires some condition to be fulfilled and requires the lender's acceptance. they have already discussed under this thread.
deed-in-lieu is preferable only if you have a place to stay. both will have negative effects on your score but the effect of bankruptcy may be more.
chapter 13 bankruptcy and deed-in-lieu both stays on your credit report for 7 years and chapter 10 stays for 10 years.
may be deed-in-lieu look slightly better in terms of getting a loan in future but lenders more often doesn't accept a deed-in-lieu due to title issues or the presence of other loans against the property.
james
We have an investment property that we have been unable to pay on for 4 months, and do not anticipate being able to pay on in the future. Our lender is in process of getting approval to do a deed in lieu, but in our negotiations they are asking if we would be willing to sign a promissary note to repay $5000. When I questioned where they got that figure from they said that was the minimum our lender would accept. Is this pretty standard or are they trying to take me for a ride?
Hi,
As far as I know, HUD allows the lender to charge $2,000 for a deed-in-lieu. These funds are utilized to pay off junior liens so that the clearance on the title in obtained. The funds may also be charged to meet the requirements in Mortgagee Letter upon vacating the property.
You can ask for the basis on which they are charging the money and may get it checked with a real estate attorney.
James
As far as I know, HUD allows the lender to charge $2,000 for a deed-in-lieu. These funds are utilized to pay off junior liens so that the clearance on the title in obtained. The funds may also be charged to meet the requirements in Mortgagee Letter upon vacating the property.
You can ask for the basis on which they are charging the money and may get it checked with a real estate attorney.
James
i have a rental property, but rent payments don't cover my mortgage payments plus equity loan. i know if i try to give the property back to the bank, i will still have to make payments for equity loan. there is not enough equity to refinance as an investment property. it's hard to sell the property for the price, which would at least pay off all the debts. what to do? we can't handle additional payments anymore. thank you
Hi Svetlana,
Why don't to discuss the matter wit your bank. When you say that you want to sell the property at least to get rid off the debts, that means that you are thinking of making any profits from the sale.
I shall suggest to talk about your financial condition with the bank and see if they agree to negotiate. You can request them for a deed-in-lieu under this condition.
Regards,
Blue
Why don't to discuss the matter wit your bank. When you say that you want to sell the property at least to get rid off the debts, that means that you are thinking of making any profits from the sale.
I shall suggest to talk about your financial condition with the bank and see if they agree to negotiate. You can request them for a deed-in-lieu under this condition.
Regards,
Blue
Hi,
Bankruptcy may be considered as another option under this condition but you should think of it only when all other options fail for you.
This may have serious impact on your credit score and history, but you can go for it if nothing positive comes out from all other efforts.
Angel
Bankruptcy may be considered as another option under this condition but you should think of it only when all other options fail for you.
This may have serious impact on your credit score and history, but you can go for it if nothing positive comes out from all other efforts.
Angel
i went bankrupt and im trying to get back on my feet but my house payment is killing me. i have been in foreclosure for 6 months now and i dont know what to do im upside down.
hi jeff,
welcome to mortgagefit forums.
i can understand your problems. these are difficult periods which come and go in everyone's life. so, keep your cool and don't get so disheartened. things will definitely improve for you.
it's already a good sign that you are trying to recover from your problems. now have you got any equity on your house so that you can get a home equity loan or may refinance the loan to get some easier terms?
you may talk to your lender and check whether you can get a solution from them. lenders generally try to find out an alternative form for the payments. a deed-in-lieu may also be asked for if you don't want to keep the house further.
just check what they suggest and you can always back here with the result so that we can discuss on it further and find out some more ways to recover.
god bless you.
for mortgagefit,
samantha
welcome to mortgagefit forums.
i can understand your problems. these are difficult periods which come and go in everyone's life. so, keep your cool and don't get so disheartened. things will definitely improve for you.
it's already a good sign that you are trying to recover from your problems. now have you got any equity on your house so that you can get a home equity loan or may refinance the loan to get some easier terms?
you may talk to your lender and check whether you can get a solution from them. lenders generally try to find out an alternative form for the payments. a deed-in-lieu may also be asked for if you don't want to keep the house further.
just check what they suggest and you can always back here with the result so that we can discuss on it further and find out some more ways to recover.
god bless you.
for mortgagefit,
samantha
Jeff,
Talk to your lender as Samantha suggested. Definitely they will come out with a solution if you can explain your intention and your financial condition clearly.
With my personal experience I can assure you that generally lenders don't like to go into a foreclosure as it kills a lot of time and money. :) Best of Luck.
Blue
Talk to your lender as Samantha suggested. Definitely they will come out with a solution if you can explain your intention and your financial condition clearly.
With my personal experience I can assure you that generally lenders don't like to go into a foreclosure as it kills a lot of time and money. :) Best of Luck.
Blue
Hi Jeff,
Deed-in-lieu can be a good option if all others fail to avoid a foreclosure especially since you in a process to recover from the bankruptcy and will not like to ruin your credit further.
Though credit score is affected with a deed-in-lieu but, possibly it is less severe than a foreclosure.
Deed-in-lieu can be a good option if all others fail to avoid a foreclosure especially since you in a process to recover from the bankruptcy and will not like to ruin your credit further.
Though credit score is affected with a deed-in-lieu but, possibly it is less severe than a foreclosure.
I owned a duplex that used to be my homestead but now I have the property rented for $2000 that covers 95% of my first mortgage payment without property tax and insurance. I also have a home equity line that I took out to fix the property I am living now. I am face with the situtation that I cannot keep paying for the equity line plus insurance and property tax. I was thinking to quit claim the property to my sister and try to to negotiate the equity line to be paid off for much less because according to the appraiser in the area I cannot sale the property for what I owed between the two mortgage. What to do, what is the best thing to do.
Hi,
Quit claiming the property to your sister will not have any effect on your mortgage payments.
Quit claiming the property to your sister will not have any effect on your mortgage payments.
One option is that you pay off your home equity line balance with a cash-out refinance of the primary mortgage you have.
Thanks
Thanks