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 lender is working with me for a deed in lieu, what is the difference if I rode my time out in a foreclosure instead of giving them the property back. Isnt it going to still show on my credit as a default or a forclosure?
I have an interested only Mortgage for $150,000. The house is now worth $100,000. I have $150,000 in a savings account. Should I pay off the mortgage or walk away from it completely and pay cash for another house. What is the better option? What are the pro's and cons? Thank you.
Hi Roxanne,
Welcome to our forums.
Even if you go for a deed-in-lieu, it will get reflected on your credit report as a negative item. Your credit score will also drop down by 250 points. However, you won't be required to pay the deficiency, if any, in case of deed-in-lieu. Please refer to a similar discussion on deed in lieu vs foreclosure to get more insight on this issue.
Good luck
Welcome to our forums.
Even if you go for a deed-in-lieu, it will get reflected on your credit report as a negative item. Your credit score will also drop down by 250 points. However, you won't be required to pay the deficiency, if any, in case of deed-in-lieu. Please refer to a similar discussion on deed in lieu vs foreclosure to get more insight on this issue.
Good luck
I have a home which I have two mortgages on the first for 200,000 and the second for 88,000. Because of the depreciation of the housing market my home is now worth about 225,000 to 230,000. my mortgage payments are over 55% of my take home pay. I finally decided to just walk away from the mortgage. I can't do DIL because of the two mortgages and a short sale couldn't be agree upon between the two lenders. If I walk and let the primary lender file for foreclosure it will leave a deficiency of about 50,000. I make a good salary and have never had a late payment on my record, but I just can make ends meet anymore. What will happen if I just turn the keys over to the lender and be done with it. Thanks for any input, I just need to know all the negative ramifications.
hi throwing money!
welcome to mortgagefit forums!
you cannot just turn the keys over to the lender. lender will want to recover the debt which you have. he will thus want to go for a foreclosure or you will have to declare a bankruptcy. you have said that a dil will not be possible then i would insist you to go for a short sale. try and negotiate with both the lenders so that they agree for a short sale.
if you go for a short sale, it will not hamper the credit score. in case of bankruptcy, your credit score will be highly affected. in case your lenders do not agree for a short sale and if you decide to claim a bankruptcy, then i would suggest you to file a chapter 13 bankruptcy. this will help you to chalk out easier terms with which you will be able to pay off ytour debts within 3-5 years.
hope this will help you.
thanks,
jerry
welcome to mortgagefit forums!
you cannot just turn the keys over to the lender. lender will want to recover the debt which you have. he will thus want to go for a foreclosure or you will have to declare a bankruptcy. you have said that a dil will not be possible then i would insist you to go for a short sale. try and negotiate with both the lenders so that they agree for a short sale.
if you go for a short sale, it will not hamper the credit score. in case of bankruptcy, your credit score will be highly affected. in case your lenders do not agree for a short sale and if you decide to claim a bankruptcy, then i would suggest you to file a chapter 13 bankruptcy. this will help you to chalk out easier terms with which you will be able to pay off ytour debts within 3-5 years.
hope this will help you.
thanks,
jerry
hi, i have a timeshare that i cannot pay any longer for maintenance. i jsut want to give up the place so the timeshare company said that i can execute a warranty deed in lieu of foreclosure. Do I have to pay the amt listed? If i sign this, will they still try to collect the unpaid amt? please help
Hi dina!
Welcome to the Forums!
When you are opting for a deed-in-lieu, you will not have to pay the listed amount. If there is a deficiency, the lenders generally forgive it. You can also talk to the lender about this.
Feel free to ask if you have further queries.
Sussane
Welcome to the Forums!
When you are opting for a deed-in-lieu, you will not have to pay the listed amount. If there is a deficiency, the lenders generally forgive it. You can also talk to the lender about this.
Feel free to ask if you have further queries.
Sussane
tks sussane..so what is my responsibility if i do a deed in lieu? if i want to just give up my timeshare i lose out on my downpayment, but a deed in lieu iis a better option than foreclosure and bad credit.what do you think?
thanks
thanks
Hi dina!
Welcome back to forums!
Yes I feel a deed in lieu will always be a better option for you. For deed-in-lieu, you will first have to transfer the property or give back the property to the lender. He will offer you a note which will state that the debts has been paid. Then the lender will try and sell the property in the market and recover his debts. Due to present situation in the real estate market, there are chances that he will not be able to recover his debts fully. There will be a deficient amount which the lenders generally forgive. However you will have to give taxes for this forgiven amount as the tax department will consider this as an income.
Sussane
Welcome back to forums!
Yes I feel a deed in lieu will always be a better option for you. For deed-in-lieu, you will first have to transfer the property or give back the property to the lender. He will offer you a note which will state that the debts has been paid. Then the lender will try and sell the property in the market and recover his debts. Due to present situation in the real estate market, there are chances that he will not be able to recover his debts fully. There will be a deficient amount which the lenders generally forgive. However you will have to give taxes for this forgiven amount as the tax department will consider this as an income.
Sussane
I recently bought a new house and planned on using my existing home as a rental. I had the house rented out for the amount of the mortgage payment. That fell through and now I can only rent it for less than my payment. I have contacted my mortgage lender and they wont work with me on lowering the payment so I can keep the house. I am a good customer and have never missed a payment or been late. They actually told me that that was part of the problem. They had options for customers who were behind in their payments, but nothing for those of us who actually pay their mortgage on time. They hinted that I should miss a payment so that they could help me now that I would be delinquent on my mortgage. My neighbor actually was told directly by their lender to do the same.
My question is¦ if I cant work something out with my lender on my rental properly and they end up having to foreclose on the house, can they touch my new home? The loan is from a different lender. I dont want to risk the home that my family lives in. I heard that I should homestead my house to protect it but I have heard that you feel that homesteading is useless. My options are to somehow sell the house short or to do a deed in lieu of foreclosure or somehow come up with the extra cash each month to cover the mortgage. The house is worth about $200k but I owe $300k on it. I guess I have to wonder if the house will ever be worth what I owe on it.
Any suggestions or thoughts on this?
My question is¦ if I cant work something out with my lender on my rental properly and they end up having to foreclose on the house, can they touch my new home? The loan is from a different lender. I dont want to risk the home that my family lives in. I heard that I should homestead my house to protect it but I have heard that you feel that homesteading is useless. My options are to somehow sell the house short or to do a deed in lieu of foreclosure or somehow come up with the extra cash each month to cover the mortgage. The house is worth about $200k but I owe $300k on it. I guess I have to wonder if the house will ever be worth what I owe on it.
Any suggestions or thoughts on this?
I have just recently lost my job of 21 years due to reorganization and cut backs. I can't not make my mortgage payments. A friend told me about deed in lieu of forclosure. Can you explain in layman terms how does this work exactly? Would I have to leave the home right away?
in california how many months can i go without paying mortgage before i can lose my house?
Hi vetty!
Welcome to Forums!
It depends upon the lender as to how he will deal with the case. Generally after 6 months the lenders try foreclosing the property.
Sussane
Welcome to Forums!
It depends upon the lender as to how he will deal with the case. Generally after 6 months the lenders try foreclosing the property.
Sussane
It states in the article that this act is not in effect in California. Does this mean that only CA State income taxes are liable? Or does this mean that federal taxes are different in each state? Any word on whether this act will be passed in CA?