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?
If I am behind on my mortgage by 2 months. I tried working out a repayment plan with mortg. company but it made things worse. I am not making enough to pay all my debts. I have a diesel truck I can't sell which I owe 15K on still and don't need. I have another loan through our credit union as well for about 14K and I have less than 15% equity left in my home. What are my options. I don't need to stay in the home and would really like to get out without destroying our already lagging credit score.
quick scenario:
my military family buys a house in fl on a 3 yr. interest only arm in 2005. i get orders to transfer to tn by jan. 2008 in mid-2007. house goes up for sale by aug. 07. i transfered alone in jan., family stays with the house to try to sell. the loan adjusted by $363 in march, but we've been able to handle it. we pull the house off the market in april in an effort to refinance and discover we're $25k upside down. meanwhile, one of our children is assessed with learning delays corresponding with autism, creating greater hardship on the family that stayed behind. all efforts to attempt loss mitigation or refinance with the lender were junk; by late summer we realize no other lender will touch us. home sales in our neighborhood run maybe one every 3 months or so, with several foreclosed properties sitting. i've since received new transfer orders to dc, and our family can no longer survive the separation.
we have a house that wouldn't/can't/won't sell(although we're preparing to place it back on the market now that all of our refinancing options are bust). the family can no longer be separated. the move to dc and subsequent loss of spousal income, even while living in military housing, will make our ever-adjusting mortgage payment gobble up nearly 50% of our income. we have great credit & a perfect payment history with everyone and everything.
does dil sound right for us? does anyone have hsbc experience who can let us know what to expect from them?
my military family buys a house in fl on a 3 yr. interest only arm in 2005. i get orders to transfer to tn by jan. 2008 in mid-2007. house goes up for sale by aug. 07. i transfered alone in jan., family stays with the house to try to sell. the loan adjusted by $363 in march, but we've been able to handle it. we pull the house off the market in april in an effort to refinance and discover we're $25k upside down. meanwhile, one of our children is assessed with learning delays corresponding with autism, creating greater hardship on the family that stayed behind. all efforts to attempt loss mitigation or refinance with the lender were junk; by late summer we realize no other lender will touch us. home sales in our neighborhood run maybe one every 3 months or so, with several foreclosed properties sitting. i've since received new transfer orders to dc, and our family can no longer survive the separation.
we have a house that wouldn't/can't/won't sell(although we're preparing to place it back on the market now that all of our refinancing options are bust). the family can no longer be separated. the move to dc and subsequent loss of spousal income, even while living in military housing, will make our ever-adjusting mortgage payment gobble up nearly 50% of our income. we have great credit & a perfect payment history with everyone and everything.
does dil sound right for us? does anyone have hsbc experience who can let us know what to expect from them?
Hi away too long!
Welcome to Forums!
It will be better if you can go in for DIL. Though your credit score will be affected but it is always considered as a better option than a foreclosure.
As far as HSBC is concerned, I haven't heard anything negative about them. They have a global presence and I hope you will have an excellent experience with them.
Feel free to ask if you have further queries.
Sussane
Welcome to Forums!
It will be better if you can go in for DIL. Though your credit score will be affected but it is always considered as a better option than a foreclosure.
As far as HSBC is concerned, I haven't heard anything negative about them. They have a global presence and I hope you will have an excellent experience with them.
Feel free to ask if you have further queries.
Sussane
My husband passed away 2 years ago. The house was placed on the market soon after that, and still has not sold. Recently, during a cleanup process, I was injured, having to have surgery and lost my job.
When I called the bank to advise them of this, wanting to make sure my credit stays good, they told me I was not on the loan. A Deed in Lieu was mentioned and I am considering this. What does this mean as far as my credit, since his name only was on the loan?
When I called the bank to advise them of this, wanting to make sure my credit stays good, they told me I was not on the loan. A Deed in Lieu was mentioned and I am considering this. What does this mean as far as my credit, since his name only was on the loan?
We have our mortgage in a Credit Union we are having to move out of state to care for family. My husband does not have a job lined up yet so we are going strickly under God's provisions. We do not want to just bail on our property, but our house is on the market with no equity and it's the highest valued property within our market specs. Will deed-in-lieu work in our case?
Hi Danoc!
If the property is highly valued in the market, then I think a deed in lieu will be accepted by the lender. You can apply for a DIL foreclosure with the lender and speak to him.
Thanks,
Jerry
If the property is highly valued in the market, then I think a deed in lieu will be accepted by the lender. You can apply for a DIL foreclosure with the lender and speak to him.
Thanks,
Jerry
I own a rental home in Florida where I can not keep up the payments or for that matter, keep a good tenant. About 3 1/2 yrs ago I refinanced and pulled out almost $100,000. I have an interest only loan and my balance is $225,000. If a BPO is done, I'm sure it will come back easily what I owe. My question is, by pulling the $100,000 out, can that effect doing a deed in lieu?
i am processing a deed in lieu for a private lender and the title report now reflects a mechanics lien on the property recorded after the lenders original deed. does the lender inherit that lien like they would a second mortgage?
Hi lendersservices!
The lender should accept the mechanics lien because you are giving away the property to the lender. But whether he will inherit the lien or not is the lender's discretion. If the lender accepts the lien, you should try to get a written acceptance from him.
Thanks.
The lender should accept the mechanics lien because you are giving away the property to the lender. But whether he will inherit the lien or not is the lender's discretion. If the lender accepts the lien, you should try to get a written acceptance from him.
Thanks.
I have a property thats been on the market since July and I have not even 1 bite on it. I owe 77,000 on it and it was appraised at 94,000. I have a prepayment penalty of 5% plus a realty fee of 6% if I sell it. So I would have to sell it for a minumim of 90,000 to walk away clean. I am considering a DIL since it doesnt seem to be worth it to keep paying a mortgage on it when Im not going to make anything. And we've already bought a new house, under my husbands name.
Do you think this is wise?
Do you think this is wise?
Hi Jessicasj!
Yes, you can go in for a deed in lieu foreclosure. However, you should remember that there will be a deficient amount from the sale of the property. There are chances that the lender may claim it from you. If he claims, then you will have to pay it or the lender may place liens on your other property. If he forgives the claim, you will have to pay taxes as the tax department will consider this as an income.
Thanks.
Yes, you can go in for a deed in lieu foreclosure. However, you should remember that there will be a deficient amount from the sale of the property. There are chances that the lender may claim it from you. If he claims, then you will have to pay it or the lender may place liens on your other property. If he forgives the claim, you will have to pay taxes as the tax department will consider this as an income.
Thanks.
my 6 month old house was damaged during a hurricane. The chimney fell off (not flew off) fell off, resulting in major water and wind damage to the interior. The insurance company is saying that the building did not meet the requirements for our area. however, it passed all required inspectioned and had all required certifications. I have gone back to the builder who says they hired an inspector that passed it therefore it is not their issue. The inspector said the fireplace was added after the inpsection and it is not their issue. the stat of texas has been involved but in the mean time we need somewhere to live and cant afford 2 house notes. what can we do?
Hi Sue!
I would first suggest you to go through the insurance papers. Check whether the damages are covered by the insurance company or not. If not, then the insurance company is justified in saying that they will not provide you with the mortgage.
It will be better if you could rent a house and live because in the present situation it is not easy to get home loans. You can live in a rented house and try repairing the house damaged by hurricane. You can then either sell it off or rent it off. You can even stay in that house if you wish too.
Thanks,
Jerry
I would first suggest you to go through the insurance papers. Check whether the damages are covered by the insurance company or not. If not, then the insurance company is justified in saying that they will not provide you with the mortgage.
It will be better if you could rent a house and live because in the present situation it is not easy to get home loans. You can live in a rented house and try repairing the house damaged by hurricane. You can then either sell it off or rent it off. You can even stay in that house if you wish too.
Thanks,
Jerry
I got a subprime interest only loan, which I did well with for 16 months until my husband left and we were divorced. my income decreased and I am now unable to pay the note for the past 3 months. My house is easily worth what the loan was for, or more. It has recently gone into default and the mortgage company has offered several options including possibly a deed in lieu. Do you think this would be a good option. I want to get out of this big house with this big note and rent in my area, with my children to be able to live more comfortably, financially. thanks.
My wife and I purchased our first home in 2005 - an old fixer-upper (built 1901) a few years ago when it was just the two of us. In retrospect, it was a poor invest decision. The home is small (1000 sq/ft) and needs a lot of work (though the previous owner made many improvements). We now have two young children and I am the only one working and supporting the family on a school teacher's income. Not only has our family outgrown the home, but we do not have the money now, nor in the foreseeable future, to make the necessary improvements to create a house that is safe & comfortable for our growing family.
I am able (just barely) to make my monthly mortgage payment, but we desperately want to get out of this home. We presently have an upside-down mortgage, so selling the home seems not to be an option. We feel as though we are trapped between a rock and a hard place - prisoners in a home we do not want to be in any longer.
Is a deed in lieu of foreclosure the best option for us? We may have an opportunity to rent my mother/step-father's home as they are in the market to purchase a new home - we would simply take over their payments. This way we could sit-out of the market for a few years to re-establish good credit before we apply for our next mortgage.
Any advice we be greatly appreciated!
Thanks.
I am able (just barely) to make my monthly mortgage payment, but we desperately want to get out of this home. We presently have an upside-down mortgage, so selling the home seems not to be an option. We feel as though we are trapped between a rock and a hard place - prisoners in a home we do not want to be in any longer.
Is a deed in lieu of foreclosure the best option for us? We may have an opportunity to rent my mother/step-father's home as they are in the market to purchase a new home - we would simply take over their payments. This way we could sit-out of the market for a few years to re-establish good credit before we apply for our next mortgage.
Any advice we be greatly appreciated!
Thanks.