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?
but the loan is not that big is only 33K
Hi amar!
As far as I can understand from your question, the first lender has accepted a deed in lieu foreclosure for the property but the second lender is not agreeing to it.
When the first lender does a deed in lieu foreclosure, he mentions a non merger clause in it which prevents the second mortgage lender to take any legal actions. However, this does not free the first lender from its liability to pay the second lender. It's the first lender's liability to pay off the junior liens unless there is some kind of negotiation with the second lender.
You can also pay off the outstanding amount to the second mortgage lender so that the lender does not charges it off to any collection agency. To know more about the effects of deed in lieu on second mortgage, check out the information available here.
Thanks,
Jerry
As far as I can understand from your question, the first lender has accepted a deed in lieu foreclosure for the property but the second lender is not agreeing to it.
When the first lender does a deed in lieu foreclosure, he mentions a non merger clause in it which prevents the second mortgage lender to take any legal actions. However, this does not free the first lender from its liability to pay the second lender. It's the first lender's liability to pay off the junior liens unless there is some kind of negotiation with the second lender.
You can also pay off the outstanding amount to the second mortgage lender so that the lender does not charges it off to any collection agency. To know more about the effects of deed in lieu on second mortgage, check out the information available here.
Thanks,
Jerry
I recently bought a home in March in west-central Pennsylvania. The house appraised at $63,000 (I payed less), and I owe $57,000 on it. I'm not behind in my payments, and I make my minimum payment every month. I never intended on staying in the home for more than a few years, but because of today's economy, my fear is that I will have difficulty selling it, and, obviously, I don't want to foreclose. I'm curious if I should try to sell it (I plan on moving in the next 8 - 20 months), or if a deed in lieu or short sale are better options for me.
Hi Jesse,
You should first list the property in the market and check if you are getting buyers for the property or not. If you get good buyers, then you can easily sell off the property. However you should remember that once you sell the property, the loan may become due and the lender will ask you to pay off the mortgage immediately. If you don't get buyers, then you can think of deed-in-lieu or short sale.
Thanks,
Jerry
You should first list the property in the market and check if you are getting buyers for the property or not. If you get good buyers, then you can easily sell off the property. However you should remember that once you sell the property, the loan may become due and the lender will ask you to pay off the mortgage immediately. If you don't get buyers, then you can think of deed-in-lieu or short sale.
Thanks,
Jerry
Hello,
I have 8 rental properties, and I recently lost my job. The tenants have not paid on most of them in a few months. I can no longer afford to keep these properties or keep the maintenance on this properties. I would like to know how does a deed and leiu work for rental properties and is that a good option or not. I live in Milwaukee, WI and nothing selling these days.
I have 8 rental properties, and I recently lost my job. The tenants have not paid on most of them in a few months. I can no longer afford to keep these properties or keep the maintenance on this properties. I would like to know how does a deed and leiu work for rental properties and is that a good option or not. I live in Milwaukee, WI and nothing selling these days.
Hello,
Hope you are having a great Thanksgiving.
My questions.
#1. Can I just give back the Deed to a Property & also have the previous owner sign a letter forgiving the debt on the mortgage note? The previous owner sold a commercial building to me via Seller Financing. I have made all payments on a commercial building & am not behind on any payments. For 18 months, I have not been able to fill the vacancy either with a Renter or Buyer.
#2. In addition to Court Recording Fees & Paperwork preparation, what other costs will I have to pay if I just return the Deed back to the previous owner?
#3. Is this situation a Deed in Lieu of Foreclosure?
Thanks for your help.
Hope you are having a great Thanksgiving.
My questions.
#1. Can I just give back the Deed to a Property & also have the previous owner sign a letter forgiving the debt on the mortgage note? The previous owner sold a commercial building to me via Seller Financing. I have made all payments on a commercial building & am not behind on any payments. For 18 months, I have not been able to fill the vacancy either with a Renter or Buyer.
#2. In addition to Court Recording Fees & Paperwork preparation, what other costs will I have to pay if I just return the Deed back to the previous owner?
#3. Is this situation a Deed in Lieu of Foreclosure?
Thanks for your help.
Hi,
To Lynn,
In the process of deed-in-lieu, you will have to give back the property to the lender who will try to sell it in the market. As you have mentioned that the market is not so good in your area, there are chances that property will be sold at a lower price. Thus, there will remain a deficient amount. In the process of deed in lieu, this deficient amount is forgiven. To know more about deed in lieu, check out the following link:
http://www.mortgagefit.com/deed-lieu.html
To JR,
You can deed back the property to the owner but there are chances that the owner will penalize you because you are breaking the contract. Whether the owner will forgive the debts will be totally the owner's discretion. You should check out the agreement and see the terms and conditions of the deal.
As far as I know, other than court recording fees and paperwork, you will also have to pay for the stamp docs. As far as deed in lieu foreclosure is considered, I think it can be done.
Thanks,
Jerry
To Lynn,
In the process of deed-in-lieu, you will have to give back the property to the lender who will try to sell it in the market. As you have mentioned that the market is not so good in your area, there are chances that property will be sold at a lower price. Thus, there will remain a deficient amount. In the process of deed in lieu, this deficient amount is forgiven. To know more about deed in lieu, check out the following link:
http://www.mortgagefit.com/deed-lieu.html
To JR,
You can deed back the property to the owner but there are chances that the owner will penalize you because you are breaking the contract. Whether the owner will forgive the debts will be totally the owner's discretion. You should check out the agreement and see the terms and conditions of the deal.
As far as I know, other than court recording fees and paperwork, you will also have to pay for the stamp docs. As far as deed in lieu foreclosure is considered, I think it can be done.
Thanks,
Jerry
Hello again Mr Jerry & Thanks for your reply.
If the Deed in Lieu of Foreclosure is done, are there any associated costs other than court recording fees & administrative paperwork?
Do I end up with a tax consequence, although I have made all payments?
Thanks again.
If the Deed in Lieu of Foreclosure is done, are there any associated costs other than court recording fees & administrative paperwork?
Do I end up with a tax consequence, although I have made all payments?
Thanks again.
Welcome,
To JR,
In case of a deed in lieu foreclosure, the deficient amount resulting from the sale of the property will be forgiven by the lender. So you will have to pay taxes on that amount as it will be considered as your income.
To Ann,
I won't say that the lender will not agree on a short sale but yes it will be difficult for you to convince him. But I would suggest you to apply for a short sale and see what the lender has to say. If the lender agrees to it, I think it will be a good option that you can take.
You will have to apply for a deed in lieu foreclosure and it will be the lender's discretion whether he will approve it or not. A deed in lieu will affect your taxes as you will have to pay taxes for the deficient amount which will be forgiven. The forgiven amount will be considered as your income.
As far as loan modification is concerned, lenders do not accept it until you default on your payments.
To JR,
In case of a deed in lieu foreclosure, the deficient amount resulting from the sale of the property will be forgiven by the lender. So you will have to pay taxes on that amount as it will be considered as your income.
To Ann,
I won't say that the lender will not agree on a short sale but yes it will be difficult for you to convince him. But I would suggest you to apply for a short sale and see what the lender has to say. If the lender agrees to it, I think it will be a good option that you can take.
You will have to apply for a deed in lieu foreclosure and it will be the lender's discretion whether he will approve it or not. A deed in lieu will affect your taxes as you will have to pay taxes for the deficient amount which will be forgiven. The forgiven amount will be considered as your income.
As far as loan modification is concerned, lenders do not accept it until you default on your payments.
From your site this tax relief act is not in effect in California. Is it now in effect in California for use with the deed in lieu of foreclosure?
I don't think the Mortgage Debt Relief Act is applicable in California. You can contact a mortgage attorney to get the updated information.
how long does it take for a foreclosure in florida?
I currently own a condo with my now ex girlfriend. We are both on the title, but she is the only one on the mortgage. I have been living there and paying the mortgage, while in the process of refinancing in my name. I have since decided that I no longer wish to keep the condo and gave her the option of buying me out (I put all the money down) or selling it. Today I received a call from the bank stating she called them asking about deed in lieu of foreclosure, even though the loan is not in default at the moment. My question is, since I am on the title, will my signature be required to proceed with a deed in lieu if the loan defaults? Also, what liability (just being on the title and not the mortgage) would I have in the event of a foreclosure?
Thanks
Thanks
I should mention I live in Illinois