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,
Let me give you an example to explain what Bolton is trying to mean,
Suppose your home equity line balance is at $50,000 and the primary mortgage is $250,000. So, if you refinance your primary mortgage for $300,000, you get excess cash of $50,000 from which you can pay off the line of credit.
Thanks
Let me give you an example to explain what Bolton is trying to mean,
Suppose your home equity line balance is at $50,000 and the primary mortgage is $250,000. So, if you refinance your primary mortgage for $300,000, you get excess cash of $50,000 from which you can pay off the line of credit.
Thanks
Hi Jr,
I think Colin has made it quite clear. Since you are thinking of paying down the balance of the equity line of credit, you can consider refinancing the existing first mortgage. By this I mean that you take a new loan against the duplex and pay off the existing loan against it. The amount of the new loan should exceed the balance of the existing loan. Now, after paying off the first loan, you can use the extra cash to repay the equity line of credit.
Thanks,
Caron.
I think Colin has made it quite clear. Since you are thinking of paying down the balance of the equity line of credit, you can consider refinancing the existing first mortgage. By this I mean that you take a new loan against the duplex and pay off the existing loan against it. The amount of the new loan should exceed the balance of the existing loan. Now, after paying off the first loan, you can use the extra cash to repay the equity line of credit.
Thanks,
Caron.
I CLOSED ON A HOUSE OCT 20 AND OCT 24 WAS INFORMED MY JOB IS TRANSFERRED TO A DIFFERENT STATE. HOW CAN I ELIMINATE THIS MORTGATE AND GIVE UP THIS HOUSE WITHOUT PENALTY SINCE I CANNOT OCCUPY IT NOW PLEASE?
If there is no prepayment penalty then you can sell it off and pay the lender. You check your mortgage note as it is mentioned in it. Also talk with the lender and explain the situation you are in as it’s just been a week you have closed on the mortgage.
As much as I know, you cannot cancel a home loan taken for buying your home. There are rare instances when the truth in lending act can help to cancel such loan. Technically, it is not possible to cancel a mortgage. There are a few rare instances when the Truth In Lending Act can work to cancel the loan, so it is better to pay it off and then move away.
our house has been on the market for a while and haven't gotten any bites yet. my husband is disabled and he can't survive another excruciating winter in new mexico. we want to move to nevada where it is much warmer. my question is we want to buy another home but we can't afford two mortgages while one house is for sale we have a first and second on our first home. we are wondering if and when to ask our mortgage company for a deed in leui, how long does it take and what happens to the second mortgage? is a deed in leui a better option than just letting our house go int forclosure?
Try to avoid foreclosure, as it has damaging affect on your credit and then in Nevada you will have difficulty purchasing your new home. If the house is not selling deed-in-lieu will be the option to choose.
Hi Millo,
Instead of thinking about doing a deed-in-lieu of foreclosure you can also select an option called the Lease Purchase Option, in which you will rent a house in Nevada with the option for you to purchase that house during the term of the lease you will take the house.
What it will do is to allow you some more time to sell the previous home and be able to pay off both the mortgages.
A deed-in-lieu would have been a good option if there was only one mortgage on the house and not two. As now the 1st lender after the deed-in-lieu of foreclosure will take over the property with a lien of the second mortgage on it and might not agree for a deed-in-lieu for that reason.
Thanks
James
Instead of thinking about doing a deed-in-lieu of foreclosure you can also select an option called the Lease Purchase Option, in which you will rent a house in Nevada with the option for you to purchase that house during the term of the lease you will take the house.
What it will do is to allow you some more time to sell the previous home and be able to pay off both the mortgages.
A deed-in-lieu would have been a good option if there was only one mortgage on the house and not two. As now the 1st lender after the deed-in-lieu of foreclosure will take over the property with a lien of the second mortgage on it and might not agree for a deed-in-lieu for that reason.
Thanks
James
Hi Guest,
It's disheartening to hear about your husband's illness. I must say you are a strong lady struggling to give your husband as much relief as possible. It's true that in your situation, it is indeed difficult to manage two mortgages and at the same time make arrangements for financing the new home.
Considering your situation, you can go for a deed-in-lieu. In case there is only one mortgage company, the company will get the title to the property and sell it to get back the outstanding loan balances. If the company thinks that it can recover the total debt amount by doing the deed in lieu, it will not go for foreclosure, as there are a lot of costs involved in the process.
However, if there are two lenders, then you will have to contact the first lender for the deed-in-lieu, as he has primary rights on the house. The first lender will in turn contact the second lender and other lien holders, if any on your property and deal with them in order to clear all the liens. The first lender will try his level best to sell off the property at a price which will help him to pay all dues and clear all liens against the property.
Thanks
It's disheartening to hear about your husband's illness. I must say you are a strong lady struggling to give your husband as much relief as possible. It's true that in your situation, it is indeed difficult to manage two mortgages and at the same time make arrangements for financing the new home.
Considering your situation, you can go for a deed-in-lieu. In case there is only one mortgage company, the company will get the title to the property and sell it to get back the outstanding loan balances. If the company thinks that it can recover the total debt amount by doing the deed in lieu, it will not go for foreclosure, as there are a lot of costs involved in the process.
However, if there are two lenders, then you will have to contact the first lender for the deed-in-lieu, as he has primary rights on the house. The first lender will in turn contact the second lender and other lien holders, if any on your property and deal with them in order to clear all the liens. The first lender will try his level best to sell off the property at a price which will help him to pay all dues and clear all liens against the property.
Thanks
A month after purchasing a home, my husband was hit w/a pay cut and his company would no longer pay for his dependents (me and the kids) health care. We refinaced our home to stay afloat and then 2 years later, my husband found an incredible job ... out of state.
We spent 9 months apart while trying to sell our home, my husband commuting back to hs family when he could. The house and neighborhood of our dreams finally became available at a very good price this past summer. So prayed, purchased the home, and relocated.
Now we have two mortgage payments and our first home has been on the market for over a year and has yet to sell or rent. We are current on all our payments as of now but are rapidly loosing money. Is a 'Deed in lieu of foreclosure' an option on an 80/20 loan (two different lenders) and a property that has monthly Home Owners Association dues? Just trying to look at all options, we don't want to have to foreclose or file bankruptcy. Thank you so much for your time and responses.
We spent 9 months apart while trying to sell our home, my husband commuting back to hs family when he could. The house and neighborhood of our dreams finally became available at a very good price this past summer. So prayed, purchased the home, and relocated.
Now we have two mortgage payments and our first home has been on the market for over a year and has yet to sell or rent. We are current on all our payments as of now but are rapidly loosing money. Is a 'Deed in lieu of foreclosure' an option on an 80/20 loan (two different lenders) and a property that has monthly Home Owners Association dues? Just trying to look at all options, we don't want to have to foreclose or file bankruptcy. Thank you so much for your time and responses.
"Is a 'Deed in lieu of foreclosure' an option on an 80/20 loan (two different lenders)"'
Deed in lieu of foreclosure will be possible if the first lender agrees to take over the house with the lien of second mortgage existing on the house.
If possible try to do cash-out refinance of the first mortgage and pay off the second mortgage from the money you get out of the refinance. You are still as of yet regular with the mortgage payments, so this might be done.
Lary Ebel
Deed in lieu of foreclosure will be possible if the first lender agrees to take over the house with the lien of second mortgage existing on the house.
If possible try to do cash-out refinance of the first mortgage and pay off the second mortgage from the money you get out of the refinance. You are still as of yet regular with the mortgage payments, so this might be done.
Lary Ebel
Hi Annon,
A deed in lieu can be an option to get rid of the first loan provided the lender agrees to take over the lien placed by the second loan. The first lender has to then pay off the second loan and thus clear the lien. Also, the lender has to take responsibility of paying for the monthly Homeowners Association dues.
However, I shall suggest that you don't think of deed- in-lieu right now. Rather, you should try to find out how you are losing money. By saying this, I mean that you need to think as to where you are spending more, how you can minimize your expenses, whether or not you plan your budget prior to spending. I think you should emphasize on these areas, as you are still current on your loan; so why go for deed-in-lieu and get a negative mark on your credit report? Give this a second thought and then if you feel you need any related advice or if there is option that you would like to discuss with this community, you are most welcome.
God bless you.
Samantha
A deed in lieu can be an option to get rid of the first loan provided the lender agrees to take over the lien placed by the second loan. The first lender has to then pay off the second loan and thus clear the lien. Also, the lender has to take responsibility of paying for the monthly Homeowners Association dues.
However, I shall suggest that you don't think of deed- in-lieu right now. Rather, you should try to find out how you are losing money. By saying this, I mean that you need to think as to where you are spending more, how you can minimize your expenses, whether or not you plan your budget prior to spending. I think you should emphasize on these areas, as you are still current on your loan; so why go for deed-in-lieu and get a negative mark on your credit report? Give this a second thought and then if you feel you need any related advice or if there is option that you would like to discuss with this community, you are most welcome.
God bless you.
Samantha
Thanks for your thoughts and suggestions! We've just been hit hard with large unexpected expenses, relocation, and more unexpected expenses these past few years and it has been draining on our resources. As soon as our other house sells, and we no longer have the burden of two mortgages, we will be able to start saving money again. Just wanted to look at options in case our account gets too close to $0.00! Would rather be prepared ahead of time rather than being backed in a corner. :) Thanks again!
Hi Annon,
Welcome back.
I have gone through your previous posts so that I could understand your situation. Anyway, it's good to know that you"ll start saving within a short time. Savings are indeed very important as in our daily life we may require immediate cash any moment. And, we can save more only when we know roughly how much we are to spend on our daily expenses and other areas. For that, I think, one needs to budget and control overspending.
Proper budgeting will help to minimize unnecessary expenses and maintain a good balance on your account. Otherwise, getting close to $0 in your account isn't a good sign. The bank may ask for a penalty and close the account if it's actually zero. So, the best thing to be on the safe side and that's why you can do a budgeting of your expenses on various items.
Earlier this community has started providing Tips on How to Save through the Budgeting forums. You can go through the discussion and in case you have any query regarding budgeting, you can come up with it in the Budgeting forums. Also, you may use the Budgeting Tool which is a user friendly software developed by this community and can be easily downloaded.
Thanks
Welcome back.
I have gone through your previous posts so that I could understand your situation. Anyway, it's good to know that you"ll start saving within a short time. Savings are indeed very important as in our daily life we may require immediate cash any moment. And, we can save more only when we know roughly how much we are to spend on our daily expenses and other areas. For that, I think, one needs to budget and control overspending.
Proper budgeting will help to minimize unnecessary expenses and maintain a good balance on your account. Otherwise, getting close to $0 in your account isn't a good sign. The bank may ask for a penalty and close the account if it's actually zero. So, the best thing to be on the safe side and that's why you can do a budgeting of your expenses on various items.
Earlier this community has started providing Tips on How to Save through the Budgeting forums. You can go through the discussion and in case you have any query regarding budgeting, you can come up with it in the Budgeting forums. Also, you may use the Budgeting Tool which is a user friendly software developed by this community and can be easily downloaded.
Thanks
I own my home with my daughter. We have tried to sell for the last 2 years with no success. We have refinanced several times for a lower interest rate. we also have a betterment of $27,000 with the town for a new septic system. With the market the way it is we have no equity left and are thinking of doing a Deed in Lieu of Foreclosure. I was laid off and am now collecting social security. My daughter has a good job and our credit is good. We need to get on with our lives. The neighborhood has deterioated with a big above ground pool very close to our propertyon lone side and our home overlooks a very messy and unattractive neighbors home below. We want out. It the DLF a good idea?