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?
Hi mark!
Yes, deed in lieu is an option for you. Your credit will also be less affected in this process. You may also try renting the house if possible. From the rent you will be able to pay off the mortgage.
But for deed-in-lieu, you will have to speak to the lender. If he approves then only you can go for it.
Thanks.
Yes, deed in lieu is an option for you. Your credit will also be less affected in this process. You may also try renting the house if possible. From the rent you will be able to pay off the mortgage.
But for deed-in-lieu, you will have to speak to the lender. If he approves then only you can go for it.
Thanks.
thanks for the reply Niicss. What about short selling? Which has less impact on my credit rating - deed in lieu or short selling? Which is the quicker way to get out of ownership?
Hi Mark!
You can also try for a short sale. This will have a less impact on your credit. However, you should remember that you will have to pay the deficient amount resulting from the short sale of the property to the lender. Both deed-in-lieu and short sale will take equal amount of time.
Thanks,
Jerry
You can also try for a short sale. This will have a less impact on your credit. However, you should remember that you will have to pay the deficient amount resulting from the short sale of the property to the lender. Both deed-in-lieu and short sale will take equal amount of time.
Thanks,
Jerry
the last post to this site was oct. 2005- is it still up and running?
We built our dream house in '04 and then my husband lost his job- it has been a downhill financial struggle ever since. We have had our house for sale since Dec. (only 1 party has looked at it). We have it for sale at "short sale" price per our lender. We now are scheduled for a hearing to begin the foreclosure process. I do believe we have 1 lien on our house in a small amount (under $5,000.00). We feel we should opt of deed in lieu of foreclosure and wonder if that is the right step for us and what amount of $$$ may be due from us if we take this route??
On 3/08 I entered into a DIL because I had to move from the area to care for my 90 yo Mom and was unable to sell my home after 5 months on the market and reducing the price to the bone. I contacted the lender for my options and was told the about the DIL. We initiated the DIL in March and it was completed in May/08. During that time I remained contractually current with my payments. I am now trying to buy a home in the area I moved to, was actually at the title company ready to close when the DIL somehow showed up on some report that was run and I lost my funding because it was consdiered a foreclosure. So what good this this actually do? Can they do that?
Hi Worried!
DIL is a sort of foreclosure but the effects of this foreclosure are far less than that of a foreclosure which is generated by a lender. A DIL will remain in your credit report for 4 years and will also lower your credit score by 250 points.
However, let me assure you that it won't be impossible for you to get a loan. But, yes, the lenders may offer you a loan at higher rate of interest. In my opinion, it will be better if you can wait for few years and built up your credit score. Then lenders may easily give you mortgage.
Thanks
DIL is a sort of foreclosure but the effects of this foreclosure are far less than that of a foreclosure which is generated by a lender. A DIL will remain in your credit report for 4 years and will also lower your credit score by 250 points.
However, let me assure you that it won't be impossible for you to get a loan. But, yes, the lenders may offer you a loan at higher rate of interest. In my opinion, it will be better if you can wait for few years and built up your credit score. Then lenders may easily give you mortgage.
Thanks
Can we continue to stay in the home and pay rent to the lender who assumes ownership of title?
Hi SRB!
This will depend upon the lender. Moreover, you can stay in the house and pay rents until the house is sold. Once it is sold, the new owner will ask to leave the property.
Thanks
This will depend upon the lender. Moreover, you can stay in the house and pay rents until the house is sold. Once it is sold, the new owner will ask to leave the property.
Thanks
If you have a foreclosure on your credit and then later file bankruptcy, does the foreclosure get cleared off your credit in the bankruptcy?
I moved to Las Vegas 4 years ago, not fully aware of my neighborhood but it seemed quiet enough. I bought a house. Well, now I live next door to drug dealers. I know the city better and want to move, but my house loan is higher than what people are willing to pay for for this area. I have tried to sell it and had it on the market for 4 months, and no one even walked through the front door. I want out, but I don't want to foreclose. I want to do deed-in lieu of foreclosure. Will I have problems? I am also behinds on my note because taxes are high.
I moved to Las Vegas 4 years ago, not fully aware of my neighborhood but it seemed quiet enough. I bought a house. Well, now I live next door to drug dealers. I know the city better and want to move, but my house loan is higher than what people are willing to pay for for this area. I have tried to sell it and had it on the market for 4 months, and no one even walked through the front door. I want out, but I don't want to foreclose. I want to do deed-in lieu of foreclosure. Will I have problems? I am also behinds on my note because taxes are high.
Hi TTN!
As you have already listed the property in the market but got no buyer, I think the lender will not allow a deed-in-lieu. Still you can speak to the lender about both deed-in-lieu and short sale. It depends upon the discretion of the lender whether he will accept it or not.
Thanks,
Jerry
As you have already listed the property in the market but got no buyer, I think the lender will not allow a deed-in-lieu. Still you can speak to the lender about both deed-in-lieu and short sale. It depends upon the discretion of the lender whether he will accept it or not.
Thanks,
Jerry
I am trying sell my house for 659k the same amount i have outstanding. Obviously i am going to be short because of commissions. My bank has said DIL is an option instead of forclosure. My question is what is a good time for the house to be on the market to show that i am trying to sell it, which I am. 70 days so far. How do I intiate a dil before i get a forclosure notice, i am at 4 months behind in payments. Should I just pursue the short sale and face the embarrassment, since all the realtors will know and I am actually in the business, what a mess Help :cry: :cry: :cry:
Hi anonymous!
You are already behind payments for 4 months. I think you should accept the bank's option of a DIL. The more you delay, the chances for a foreclosure will increase. You haven't mentioned your state in the post. In some states a deficiency judgment can be passed where in you will be required to pay the deficient amount (balance amount - amount recovered from property sale) to the lender.
By the way, are you a lender?
Thanks.
You are already behind payments for 4 months. I think you should accept the bank's option of a DIL. The more you delay, the chances for a foreclosure will increase. You haven't mentioned your state in the post. In some states a deficiency judgment can be passed where in you will be required to pay the deficient amount (balance amount - amount recovered from property sale) to the lender.
By the way, are you a lender?
Thanks.