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?
My son refinanced his home a couple of years ago, with a negative amoritization loan, buying all the arguments that his home would increase in value. We all know what has happened to the market. He has a prepayment clause in his loan, which in four months goes away, but - his house payment will double. He already knows he cant afford the increase, and he now owes more on his loan that his property is worth. He has been advised by a realtor that his best option is to hope for a Short Sale, and by another buisness man to try for Deed in Lieu of Foreclosure.
He finally began talking with his Lender today (about a year to late in my opinion) to find options. However, in the research I have done, the lender will not entertain a short sale until an offer has been made, (his house is not on the market), and a Deed-in-Lieu can't even be executed until he is already in default - and he must occupy the home when the agreement is executed.
Am I correct on both of these observation? What other options might he have. As stated on the HUD site, he would NOT want to puposely default the loan just to qualify.
The other negative he has is that the property is in California.
He finally began talking with his Lender today (about a year to late in my opinion) to find options. However, in the research I have done, the lender will not entertain a short sale until an offer has been made, (his house is not on the market), and a Deed-in-Lieu can't even be executed until he is already in default - and he must occupy the home when the agreement is executed.
Am I correct on both of these observation? What other options might he have. As stated on the HUD site, he would NOT want to puposely default the loan just to qualify.
The other negative he has is that the property is in California.
Hi Guest,
Welcome to the forum.
I would not suggest you to be delinquent on your payments as it is not the way to go but the lender is not interest in short sale or deed in lieu because he may have so many clients who are in even worse condition than you. BTW the market is down but can try out something like forbearance or loan modification.
Check out how you can protect yourself from the foreclosure trap at http://www.mortgagefit.com/foreclosure/17ways-avoid.html
Hope it helps.
Feel free to ask if you have any further questions.
Best of luck,
Larry
Welcome to the forum.
I would not suggest you to be delinquent on your payments as it is not the way to go but the lender is not interest in short sale or deed in lieu because he may have so many clients who are in even worse condition than you. BTW the market is down but can try out something like forbearance or loan modification.
Check out how you can protect yourself from the foreclosure trap at http://www.mortgagefit.com/foreclosure/17ways-avoid.html
Hope it helps.
Feel free to ask if you have any further questions.
Best of luck,
Larry
Hi we've recently consulted a bankruptcy lawyer and still don't know what to do. We are up to date on our mortgage which is an 80/20 held by two separate lenders. Countrywide and First Franklin. We are still trying to find options other than bankruptcy or foreclosure. The combined money we pay out a month in credit card debt (we've enrolled in credit counseling and reduced that payment), but it's not enough, with our living expenses (just had our first baby in Nov. and mortgage we just can't make it anymore) We've had our house on the market going on 5 months and according to Countrywide our house market value has dropped below the amount owed. We had tried to refinance with Countrywide at least three times with no luck since we have no equity in our home at interest only loans. I didn't know if you knew of any options that would work when we have two separate lenders to deal with. I did see that Deed in Lieu of Foreclosure was an option if you were working with one lender and the home was valued at least for the amount you owed on the loan. Is there anything we can do that would be similar to this. We've read about short sales to, but again don't know how the two lenders changes the process. Please if you have any advice or information. We would really appreciate it! Thanks for your time.
Hi Jeanna,
With two lenders you can still do a short sale which by the way is probably your best option. Lenders typically will not accept a Deed in Lieu (DIL) when more is owed on the property than it is worth.
You will need to hire someone who is a “short sale specialist†this is someone who has worked multiple short sales and is familiar with the process. Basically what they will do is negotiate with your first lender. They will also negotiate with your second lender to accept a minimal payoff.
Once you have completed the short sale you will need to enter into a credit restoration program in order to get your credit back up to par. I know this may seem like a lot but, it is definitely possible.
Hope this helps if you have any further questions feel free to ask.
:D
With two lenders you can still do a short sale which by the way is probably your best option. Lenders typically will not accept a Deed in Lieu (DIL) when more is owed on the property than it is worth.
You will need to hire someone who is a “short sale specialist†this is someone who has worked multiple short sales and is familiar with the process. Basically what they will do is negotiate with your first lender. They will also negotiate with your second lender to accept a minimal payoff.
Once you have completed the short sale you will need to enter into a credit restoration program in order to get your credit back up to par. I know this may seem like a lot but, it is definitely possible.
Hope this helps if you have any further questions feel free to ask.
:D
Is Deed-In-Lieu is best option for us? Bought our house in Jan'07 and due to husband's commission only job not really working out we've been paying half our bills with credit cards. Realizing we needed to rectify the situation before we sunk any deeper I found a good salaried job in another state and husband has found work too - still commission but small salary so we have relocated 7 hours away. House has been on market for 4 months with NO offers. We have about 25,000 in equity and have our house priced where we are paying commissions to our realtor but walking away with nothing in our pocket. We are priced right and in a great area but still no interested buyers. If Deed-In-Lieu is best option how long does this adversely affect credit scores? Will my credit be hurt too? I am on the deed only - not the loan.
Welcome K-girl,
If you are not on the mortgage it wil not affect your credit score. Also, credit is easily restored with the proper advisor doing the credit restoration.
You need to ask your realtor what the "median days on market" are for your neighborhood. This will help me advise you if a deed-in-lien (DIL) short sale is better for you. Here is a brief explanation of both.
Short Sale: A "short sale" is a sale of the property for less than the total amount owed on the mortgage. If the home owner owes more on their property than it is worth, an investor (we can arrange you with an ethical investor) may be able to convince the mortgage company to accept a short sale. Most lenders would rather have the majority of their money back than the hassle of a foreclosure, legal fees, renovation, and marketing costs associated with the reselling of the property.
Deed-in-Lieu: A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor (home owner) voluntarily deeds the property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from home owners who can financially make their mortgage payments.
Depending what information you provide me with I will be better able to tell you which option your lender will go for.
Hope this helps. :D Any other questions you need answered I'm her for you.
If you are not on the mortgage it wil not affect your credit score. Also, credit is easily restored with the proper advisor doing the credit restoration.
You need to ask your realtor what the "median days on market" are for your neighborhood. This will help me advise you if a deed-in-lien (DIL) short sale is better for you. Here is a brief explanation of both.
Short Sale: A "short sale" is a sale of the property for less than the total amount owed on the mortgage. If the home owner owes more on their property than it is worth, an investor (we can arrange you with an ethical investor) may be able to convince the mortgage company to accept a short sale. Most lenders would rather have the majority of their money back than the hassle of a foreclosure, legal fees, renovation, and marketing costs associated with the reselling of the property.
Deed-in-Lieu: A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor (home owner) voluntarily deeds the property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from home owners who can financially make their mortgage payments.
Depending what information you provide me with I will be better able to tell you which option your lender will go for.
Hope this helps. :D Any other questions you need answered I'm her for you.
Hi K-girl,
It's good that you realized that you shouldn't be paying bills with credit cards. After all, it's like paying off debt while at the same time piling up more and more debt. But it's good that you've got a well-paid job now. At least you can pay off your credit card debts as it's no use accumulating them.
As for the mortgage, I think a deed-in-lieu may be the best option for you because the house isn't selling and you need to relocate too; so how long can you wait.
Regarding your credit getting affected, well that's for sure to happen but if you don't trying paying the debts it's going to have a bigger impact later on. Your credit score is likely to drop down by 250 points if you go for a deed-in-lieu. But I think that's the only way out for you right at the moment.
Regards,
Jessica.
It's good that you realized that you shouldn't be paying bills with credit cards. After all, it's like paying off debt while at the same time piling up more and more debt. But it's good that you've got a well-paid job now. At least you can pay off your credit card debts as it's no use accumulating them.
As for the mortgage, I think a deed-in-lieu may be the best option for you because the house isn't selling and you need to relocate too; so how long can you wait.
Regarding your credit getting affected, well that's for sure to happen but if you don't trying paying the debts it's going to have a bigger impact later on. Your credit score is likely to drop down by 250 points if you go for a deed-in-lieu. But I think that's the only way out for you right at the moment.
Regards,
Jessica.
Average time on market is 270 days (9 months). And time is not on our side because since we relocated a few weeks ago - so I could start my new job - we are staying with my parents in a retirement community with very strict HOA restrictions regarding the 'length' that guests can stay. We have to secure housing by mid-July. We have a friend who owns a home which will be available to rent around that time that is ours if we want it. While I'm making good money I will not be able to afford the mortgage plus the 'new' rent and all our other bills without having to lean on credit cards again. I have not had any lates on the house and we are current. When I talked to the bank I got the impression we would not qualify for a short-sale, but they are sending us paperwork regarding a deed-in-lieu. They told us we had to be on the market for 3 months with no reasonable offers to qualify. Well we've been on since 2/25/08 with only 5 showings. We are in a rural area - even though we are considered a bedroom community of DC - it's at least 90 minutes by train - and houses in our neighborhood are prices 325K and above. Difficult to move in a rural area but we do get some commuters who had rather trade in a longer ride to work for more affordable housing and the small town feel. Thanks for all the advice.
BTW: We do not have any second liens on the house or anything like that. Guess this makes a difference in the deed-in-lieu world.
Yes it does make a difference. It sounds like a DIL like Jessica said would be your best option.
Make sure to carefully fill out all the paperwork the mortgage company sends you. Mortgage companies a notorious for not starting work on DIL just because all the paperwork is not filled out correctly.
If you need more help just feel free to ask. We are here to support you. :D
Make sure to carefully fill out all the paperwork the mortgage company sends you. Mortgage companies a notorious for not starting work on DIL just because all the paperwork is not filled out correctly.
If you need more help just feel free to ask. We are here to support you. :D
What happens if we do a deed-in-lieu with our primary mortgage company? How do we go about dealing with the 2nd mortgage? They are not willing to work with us as much as the primary mortgage company is.
It sound like you should be doing a short sale instead of a DIL. Are you upside down in your current home?
K a 2nd has the most to lose. The first has to get paid in full before the second sees a cent. It is VERY difficult tp get the seconds to agree to a short sale
Brian
Brian
I currently have an option to sell a rental property I own via short sale to an investor or give the house back to the lender as Deed-in-Lieu. Can you tell me which option would be better for me as far as credit goes, taxes etc.