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?
Welcome Lauren.
Short sale is a better option compared to deed in lieu of foreclosure and it will have less negative affect on your credit report. So have you contacted with the mortgage company and asked for options available for you. You can even go for loan modification or forbearance. Take a look at 17 ways to protect yourself from the foreclosure trap .
By the way in case of short sale you will have to pay tax if the sale price is lesser than what you owe to the Mortgage Company or lender.
Hope to see you on the forums.
Short sale is a better option compared to deed in lieu of foreclosure and it will have less negative affect on your credit report. So have you contacted with the mortgage company and asked for options available for you. You can even go for loan modification or forbearance. Take a look at 17 ways to protect yourself from the foreclosure trap .
By the way in case of short sale you will have to pay tax if the sale price is lesser than what you owe to the Mortgage Company or lender.
Hope to see you on the forums.
My bankruptcy has been discharged and my 1st mortgage company is proceeding with foreclosure. Should I let the foreclosure continue since I have not obligation or should I seek a deed in lieu? How will this affect the 2nd mortgage?
Welcome Gd.
Is the bank bankruptcy discharged or dismissed? Have you filed chapter7 or chapter 13. We need to know these to answer your questions.
Is the bank bankruptcy discharged or dismissed? Have you filed chapter7 or chapter 13. We need to know these to answer your questions.
We filed chpt 7 and it is discharged.
Hello Gd.
In bankruptcy chapter7 all the assets are sold to pay off the lenders or creditors. But there are some exemptions. So was the property you primary residence and was it exempted. As far as I know after filing chapter7, the borrower is released from all his debts and all his assets are sold. So is the property being sold under chapter7?
In bankruptcy chapter7 all the assets are sold to pay off the lenders or creditors. But there are some exemptions. So was the property you primary residence and was it exempted. As far as I know after filing chapter7, the borrower is released from all his debts and all his assets are sold. So is the property being sold under chapter7?
hi johnny1,
thanks for the response. my bankruptcy did not work like that at all. i kept everything and nothing was taken from me to be sold. i can walk away from everything now that the discharge is final - i have no obligation to any of my previous debt. i will eventually turn in my cars when the banks come to get them. as far as my home, it is my primary home and the first mortgage company is proceeding with foreclosure. i am basically looking for the easiest way to end this entire mess and not have to pay taxes etc.. because of the second mortgage.
thanks for the response. my bankruptcy did not work like that at all. i kept everything and nothing was taken from me to be sold. i can walk away from everything now that the discharge is final - i have no obligation to any of my previous debt. i will eventually turn in my cars when the banks come to get them. as far as my home, it is my primary home and the first mortgage company is proceeding with foreclosure. i am basically looking for the easiest way to end this entire mess and not have to pay taxes etc.. because of the second mortgage.
is rental property qualified to do deed in lieu of foreclosure the property is in arizona who is qualified for the deed in lieu or foreclosure
Hi Gd.
Talk to your first lender ASAP and request him to accept the deed in lieu.
hi cv grl.
It depends upon the lender whether he accepts the deed in lieu or not. Basically it saves the legal fees of the foreclosure process and that's why lenders generally accept the deed in lieu. So tale to your lender and request him to accept the DIL,
Feel free to ask if you have ant further questions.
Best of luck,
Larry
Talk to your first lender ASAP and request him to accept the deed in lieu.
hi cv grl.
It depends upon the lender whether he accepts the deed in lieu or not. Basically it saves the legal fees of the foreclosure process and that's why lenders generally accept the deed in lieu. So tale to your lender and request him to accept the DIL,
Feel free to ask if you have ant further questions.
Best of luck,
Larry
I have two mortgages on my loan, How do I go about doing a "deed in lieu of foreclosure" on both loans
that's right cliff, there are several other options except a deed-in-lieu.
bazooka, you can negotiate with your lender for loss mitigation options like repayment plan or a special forbearance. if the lender feels that none of the options are suitable for you, then you may ask for a loan modification. prior to negotiating with the lender, you need to submit a hardship letter stating why you can't pay anymore and which option you would opt for and why. know more about hardship letter and loss mitigation options that can be suitable alternatives to deed-in-lieu.
regards,
jessica.
bazooka, you can negotiate with your lender for loss mitigation options like repayment plan or a special forbearance. if the lender feels that none of the options are suitable for you, then you may ask for a loan modification. prior to negotiating with the lender, you need to submit a hardship letter stating why you can't pay anymore and which option you would opt for and why. know more about hardship letter and loss mitigation options that can be suitable alternatives to deed-in-lieu.
regards,
jessica.
I have had my house on the market for four months after the death of my spouse in January. It was a two income mortgage so I moved out and put the house on the market hoping for a quick sale-- No offers even after two price reductions. I am not behind on my payments and just recently negotiated a forebearance with the mortgage bank. From all I have read a DIL seems like the best choice for me if the bank will approve it. Any suggestions on how to go forward?
Thanks,
Saundra
Thanks,
Saundra
Hi Saundra.
Welcome to the forum.
You have already with the bank for the forbearance. So the bank may not agree for the deed in lieu now but you should at least inform the bank that you want to get for deed in lieu of foreclosure.
Best of luck,
Larry
Welcome to the forum.
You have already with the bank for the forbearance. So the bank may not agree for the deed in lieu now but you should at least inform the bank that you want to get for deed in lieu of foreclosure.
Best of luck,
Larry
Hi Saundra,
Is it that you don't want to continue paying the mortgage any more? because if you've been offered a forbearance, that's pretty good considering the credit effects that a deed in lieu may have.
In most cases, if the borrower fails to follow a forbearance plan, the lender may consider approving a deed in lieu. But in your situation, is there any payment problem with the forbearance plan?
Take Care
Is it that you don't want to continue paying the mortgage any more? because if you've been offered a forbearance, that's pretty good considering the credit effects that a deed in lieu may have.
In most cases, if the borrower fails to follow a forbearance plan, the lender may consider approving a deed in lieu. But in your situation, is there any payment problem with the forbearance plan?
Take Care
thanks for the info. the forbearance is only for 90 days. i'm already "in the hole" on the house, and would just like it to go away if i don't get any offers. it will go to a short sale if no offers come in but i have heard that
a dil is easier, faster, and a little better on credit. is that right?
thanks,
saundra
a dil is easier, faster, and a little better on credit. is that right?
thanks,
saundra