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 guest,
It seems that you're a realtor. Well, if the bank has accepted a deed-in-lieu, I feel you should go for it. This is because a deed in lieu waives off the lender's right to seek deficiency payment. What you need to do now is, talk to the lender saying that you're ready to give away your property.
By the way, there's no such time limit as to how long a house can be on the market. the sooner you go for the deed in lieu, the better as otherwise the lender may initiate a foreclosure.
Regards,
Jessica.
It seems that you're a realtor. Well, if the bank has accepted a deed-in-lieu, I feel you should go for it. This is because a deed in lieu waives off the lender's right to seek deficiency payment. What you need to do now is, talk to the lender saying that you're ready to give away your property.
By the way, there's no such time limit as to how long a house can be on the market. the sooner you go for the deed in lieu, the better as otherwise the lender may initiate a foreclosure.
Regards,
Jessica.
what type of deed is used, like a quit claim deed
we are not behind in mortgage paymts. up to date.
paymt way to high and cant get refinanced because we owe more then house is worth and paying min. paymt each month, i owe to much in credit card debt to ratio ,,our taxes and our house insurance are included in the payment, plus the pmi.
my question is we are walking away from the house and handing over the keys to the mortgage company, calling it quits,,
how do i go about doing that ?
paymt way to high and cant get refinanced because we owe more then house is worth and paying min. paymt each month, i owe to much in credit card debt to ratio ,,our taxes and our house insurance are included in the payment, plus the pmi.
my question is we are walking away from the house and handing over the keys to the mortgage company, calling it quits,,
how do i go about doing that ?
just want to walk away from mortgage,,fast and quick
Hi caddiet!
Walking away from the property will initiate foreclosure action. The lender will take away the property and can place liens or garnish wages if it cannot recover the whole debt. I would suggest you check the various options available with the lender.
You can try for a loan modification in which you will be given a loan repayment plan. Or you can also try for a short sale or a deed in lieu foreclosure.
Thanks,
Jerry
Walking away from the property will initiate foreclosure action. The lender will take away the property and can place liens or garnish wages if it cannot recover the whole debt. I would suggest you check the various options available with the lender.
You can try for a loan modification in which you will be given a loan repayment plan. Or you can also try for a short sale or a deed in lieu foreclosure.
Thanks,
Jerry
I would like info on a deed in lieu... I have 2 properties
We are 2 months behind on our mortgage payment ($330,000 balance due on a home with an appraisal of $600,000) to a decrease in income. We moved 250 miles for a new job so the house is vacant and in excellent condition. We have a property tax lien and association dues lien.We are contemplating a DIL and the lender has been open. We have tried to sell this house for over a year, even offering a short sale.
Question: Only my husbands name is on the loan. Will my credit also take a hit?Do we need to get an attorney?
Question: Only my husbands name is on the loan. Will my credit also take a hit?Do we need to get an attorney?
Hi cj bailey,
If your name is not on the loan, then your credit will not be affected. If your name is on the deed, then you can pay the dues in order to save the property.
You have mentioned that there are liens on the property. Does the lender know that? You must inform the lender about the liens and also try to pay them off.
You can take the help of an attorney to negotiate with the lender or to draft the legal documents during the DIL.
Thanks,
Jerry
If your name is not on the loan, then your credit will not be affected. If your name is on the deed, then you can pay the dues in order to save the property.
You have mentioned that there are liens on the property. Does the lender know that? You must inform the lender about the liens and also try to pay them off.
You can take the help of an attorney to negotiate with the lender or to draft the legal documents during the DIL.
Thanks,
Jerry
What happens to mechanics liens on the property that will be under the deed-in-lieu foreclosure? Do those disappear or does the Borrower have to pay them?
What happens if you have a 2nd mortgage - an 80/20 loan?
welcome anonymous.
often lenders do not accept deed in lieu if there are mechanic liens on the property. and even if they accept, in most cases, they pay off mechanic liens such as second mortgage and others.
for more details on this issue, you may check out a previous discussion on how deed in lieu affects junior liens .
thanks.
often lenders do not accept deed in lieu if there are mechanic liens on the property. and even if they accept, in most cases, they pay off mechanic liens such as second mortgage and others.
for more details on this issue, you may check out a previous discussion on how deed in lieu affects junior liens .
thanks.
Hi Sue,
Welcome to the forums.
If there's a deed in lieu on the first loan, then I guess the first mortgage lender has the liability to pay off the second. Just go through the page referred by helping_user in the post above for a better idea on this issue.
Take Care
Welcome to the forums.
If there's a deed in lieu on the first loan, then I guess the first mortgage lender has the liability to pay off the second. Just go through the page referred by helping_user in the post above for a better idea on this issue.
Take Care
Thanks for the info - I'm sending a letter off today to my 1st mortgage requesting options. I'll see what they say first.
How can I convince the second mortgage to release the loan to Deed in Lieu of Foreclosure? And professional help me do it