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 question is about the deed in lieu. I moved out of my property back in February of 2008 because my bank said that they were going to forclose on us. We found an investment company & realtor to help list the property and stop the foreclosure. It has been on the market since Feb, 2008 under a short sale & still no offer. I was told by the investor that I should consider doing the deed in lieu to help us get out of the mortgage. We have a 1st & 2nd mortgage 80/20 under the same lender. The lender has already approved the 1st mortgage into the DIL, we are just waiting on the 2nd mortgage right now. If they approve the DIL on the 2nd mortgage, can they come after us for any deficiencies after the deal is done? We took the loan out to purchase the property only & have never refinanced or did any kind of equity line of credit. I was told by some one that if that is the case, they can't come after us for any differences. Is that true? I feel that we have been communicating with the lender and trying to work out any way to save our home, but it seems useless at this stage. We have no more cash to spare and feel that this might be are last resort. Please let us know if this is the best way to go about doing this.
Hi EROXXZY,
Welcome to forums.
I think your parents are being asked to send a hardship letter wherein they should state why they cannot pay off the loan and what alternative option they would like to go for so that the lender can recover the money invested. Know how to write a sample hardship letter for your reference.
"What are the laws in P.A. when it comes to Deed In Lieu of Foreclosure?"
If it's a deed in lieu, then your parents shouldn't be personally liable for the any amount or deficiency that the lender may not be able to recoup by selling off the home after it is deeded back to the lender.
Although PA is a deficiency judgment state, but as your parents are going for a deed in lieu, they don't need to pay any deficiency. But there can be tax considerations involved. Know more on deed in lieu and tax considerations .
Thanks
Welcome to forums.
I think your parents are being asked to send a hardship letter wherein they should state why they cannot pay off the loan and what alternative option they would like to go for so that the lender can recover the money invested. Know how to write a sample hardship letter for your reference.
"What are the laws in P.A. when it comes to Deed In Lieu of Foreclosure?"
If it's a deed in lieu, then your parents shouldn't be personally liable for the any amount or deficiency that the lender may not be able to recoup by selling off the home after it is deeded back to the lender.
Although PA is a deficiency judgment state, but as your parents are going for a deed in lieu, they don't need to pay any deficiency. But there can be tax considerations involved. Know more on deed in lieu and tax considerations .
Thanks
Welcome Jon.
Deed in lieu of foreclosure is a process wherein you give back property to your lender when you fail to pay off the mortgage debt. Since the first lender has already accepted a deed in lieu, he'd be taking away the property and selling it off. So, there cannot be a separate deed in lieu. But if the housing market is good enough in our area, then the sale proceeds obtained after the deed in lieu on the first can be shared by both the lenders provided they agree to do so.
Usually lenders don't ask for deficiency payment in deed in lieu. So, hopefully they won't come after you once they sell the property.
Thanks.
Deed in lieu of foreclosure is a process wherein you give back property to your lender when you fail to pay off the mortgage debt. Since the first lender has already accepted a deed in lieu, he'd be taking away the property and selling it off. So, there cannot be a separate deed in lieu. But if the housing market is good enough in our area, then the sale proceeds obtained after the deed in lieu on the first can be shared by both the lenders provided they agree to do so.
Usually lenders don't ask for deficiency payment in deed in lieu. So, hopefully they won't come after you once they sell the property.
Thanks.
Thank you all =) I'll be crossing my fingers that they accept the deed in lieu and won't ask for deficiency payments. Wish me luck!!!
my property has a 150k mortgage and an IRS lien of 65k, but property value is 200k. if I do a deed in lieu will I still owe anything?
See above post: I have missed 3 payments, it is a rental (currently rented) and I do not want to keep the home (I want it gone so the IRS lien will get paid in full thus the lien will no longer be on a vacant lot behind the home, a separate parcel). The lien is not against me, its against the prior owner (both parcels), and was their when I did a owner deed purchase. When I refi'd with this lender, Title was a lenders owner policy and they missed the lien, so it appears lender is protected. So, I am simply trying to get rid of property so that IRS lien eventually gets paid. Its in Washington State. Credit hit is not a problem. What should I do?
All the best eroxxzy. Let's hope that the deed in lieu is accepted.
To randoon:
I think the IRS lie will have priority over the mortgage lien. as such, the IRS lien should be paid off first and then the remaining amount should go towards the mortgage. Usually in case of deed in lieu, lenders don't ask for the payment of deficiency.
"The lien is not against me, its against the prior owner (both parcels), and was their when I did a owner deed purchase. "
Even though the IRS lien is not against you, it should be paid off because you have purchased the property.
Good luck
To randoon:
I think the IRS lie will have priority over the mortgage lien. as such, the IRS lien should be paid off first and then the remaining amount should go towards the mortgage. Usually in case of deed in lieu, lenders don't ask for the payment of deficiency.
"The lien is not against me, its against the prior owner (both parcels), and was their when I did a owner deed purchase. "
Even though the IRS lien is not against you, it should be paid off because you have purchased the property.
Good luck
We got caught in the real estate downturn when buying a house before the other one sold. We now have two mortgages with the same mortgage company. We are not delinquent on either loan but are using up our savings quickly. Both houses are now on the market, but without immediate prospects of selling. If we do a deed in lieu of foreclosure on one house, can the mortgage company put any type of additional lien on the house we keep as long as we continue to be current with that mortgage? Both homes are in North Carolina.
Hi stuck,
Welcome to the forums.
I guess the lender won't place a line on the other property because of deed in lieu on one house. This is because deed in lieu waives the lender's right to collect deficiency.
Take care
Welcome to the forums.
I guess the lender won't place a line on the other property because of deed in lieu on one house. This is because deed in lieu waives the lender's right to collect deficiency.
Take care
Can a deed in Lieu still apply if i have a jumbo load split into 2 mortgages.. an 80% ande 15% loan? and could it still apply if i have it with two different lenders?
Hi Melissa,
It's difficult to make a deed in lieu (dil) work if there are 2 loans on your home, especially, if there are 2 lenders and a junior lien on the property. To know what happens to the second after dil on first , refer to a previous community discussion.
Take Care
It's difficult to make a deed in lieu (dil) work if there are 2 loans on your home, especially, if there are 2 lenders and a junior lien on the property. To know what happens to the second after dil on first , refer to a previous community discussion.
Take Care
my dad help my uncle buy a house cause he was in bankrupt ... so the house is in his name.. now my uncle can;t afford the house n is two payments behind and now my dad's credit is in danger n also we might end in bankruptcy.... so we are thinking in the dil.... but i dont know how it works n how it might affecct us...
Well, a deed in lieu is where a borrower surrenders property to the lender having been unable to make payments on the mortgage. But there are certain eligibility criteria that the borrower must fulfill in order to qualify for deed in lieu. You'll find them at http://www.mortgagefit.com/problems/dil-pmi.html#59364 .
may god bless you.
Samantha
may god bless you.
Samantha
Is there a difference? What is it? Is one solution better than the other?