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?
it is possible to obtain a deed in lieu of forclosure with a second mortgage?
Hi,
To jay,
As your name is on the title of the property, I think your signatures will be required by the lender. But you will not be liable for the mortgage payments in any way. Also as your name is not on the mortgage note, your credit will not be affected. It will be your ex-girlfriend's credit that will be affected.
To Jackie,
It may be possible to get a deed in lieu foreclosure on the second mortgage but then you will have to pay the first mortgage in full. Otherwise the first mortgage lender will object to the deed in lieu foreclosure.
James
To jay,
As your name is on the title of the property, I think your signatures will be required by the lender. But you will not be liable for the mortgage payments in any way. Also as your name is not on the mortgage note, your credit will not be affected. It will be your ex-girlfriend's credit that will be affected.
To Jackie,
It may be possible to get a deed in lieu foreclosure on the second mortgage but then you will have to pay the first mortgage in full. Otherwise the first mortgage lender will object to the deed in lieu foreclosure.
James
Hello,
Wanted to clarify a question & answer that I received.
As a reminder, I am current on all payments for a property.
If I give the property back to the lender, who sold to me via Seller Financing, will I incur a tax consequence when he receives back the property @ the mortgage balance although I am current on all payments? The mortgage balance would be the pseudo "Sales Price" for the property.
Thanks & have a great day.
Semper Fi!!!
Wanted to clarify a question & answer that I received.
As a reminder, I am current on all payments for a property.
If I give the property back to the lender, who sold to me via Seller Financing, will I incur a tax consequence when he receives back the property @ the mortgage balance although I am current on all payments? The mortgage balance would be the pseudo "Sales Price" for the property.
Thanks & have a great day.
Semper Fi!!!
Hi JR
In my opinion, if you are receiving any money from that person then you may have to pay taxes. If the sale price does not cross the exemption limit, then you will not have to pay the taxes.
Thanks.
In my opinion, if you are receiving any money from that person then you may have to pay taxes. If the sale price does not cross the exemption limit, then you will not have to pay the taxes.
Thanks.
I am attempting to negotiate a Deed in Lieu on my principle residence with a lender. My house has been on the market for over one year with no sale or offers. The lender's requirements for a deed in lieu arrangement indicate that the home must have been on the real estate market for over 90 days. When told that my residence has been on the market for over one year I was told by the lender that Freddie Mac and Fannie Mae guidelines require that my home continue on the market for an additional 90 days at a "short sale" price before they will even consider a deed in lieu arrangement. Is anyone aware of whether or not this statement made to me by the lender is true ??? Thank you very much for your time.
Hi Ray M.
As far as I know, the property has to be listed with the realtor for 90 days in order to get approved for a short sale. If your property has been already listed for 90 days, then I think the lender should agree to a short sale. In my opinion, you should seek a proper explanation from the lender about why he is not agreeing for a short sale. If he cannot give you a satisfactory reply, then you should negotiate about a deed in lieu foreclosure.
Thanks.
As far as I know, the property has to be listed with the realtor for 90 days in order to get approved for a short sale. If your property has been already listed for 90 days, then I think the lender should agree to a short sale. In my opinion, you should seek a proper explanation from the lender about why he is not agreeing for a short sale. If he cannot give you a satisfactory reply, then you should negotiate about a deed in lieu foreclosure.
Thanks.
I currently recieved a new job in a different state. I purchased a second home in that state and my family has moved there. My old home in the area I used to live has dropped in value to a point that I owe more than it is currently worth. I have one primary loan and a line of credit drawn on the old home. I am not behind on any payments at this time, but lets just say budgets are tight. The house has been on the market for about 120 days.
My current plan is to contact a real estate lawyer, but this will add cost right now that I really can not afford if it does not help in the end.
Would I be better off calling the companies that the house is morgaged under first and seeing if they can let me short sell the home? If so how do I do this with two banks involved?
Would it be quicker to just go straight to a deed in lieu of foreclosure?
Can I do this without actually being behind on payments?
Can they attach leans to my new house if they don't get full repayment?
Thank you in advance!
David
My current plan is to contact a real estate lawyer, but this will add cost right now that I really can not afford if it does not help in the end.
Would I be better off calling the companies that the house is morgaged under first and seeing if they can let me short sell the home? If so how do I do this with two banks involved?
Would it be quicker to just go straight to a deed in lieu of foreclosure?
Can I do this without actually being behind on payments?
Can they attach leans to my new house if they don't get full repayment?
Thank you in advance!
David
I own a 2nd home in Saint Petersburg, Fl. I bought it in August of 2006 for $218k with a 80/10/10 loan with Wells Fargo (both first and 2nd mortgage are with Wells Fargo). The condo is now worth $70k at the most. My income has dropped and I have a baby on the way. I have $25k in one IRA, $65k in another IRA rollover, $20k in a 401k, and about $20k in CDs and cash. I can no longer afford the payments and I believe a died in lieu will be my best option. I am still current on my payments, but I have literally been paying the mortgage with my savings account. So eventually I will not be able to make the payments at all. Furthermore, I am having trouble even finding a Real Estate agent that is willing to list it. Do you think Wells Fargo would even consider doing a Died in Lieu? What should I do? Any advice would be appreciated. My wife and I are about to have our first baby, but I feel like we cannot even enjoy the experience because this is looming over our heads. :cry:
Hi Timmy,
You should immediately contact Wells Fargo and tell them about your hardship. You will have to write a hardship letter to the lender and apply for a deed in lieu. But it is totally their discretion whether they will accept it or not.
Thanks,
Jerry
You should immediately contact Wells Fargo and tell them about your hardship. You will have to write a hardship letter to the lender and apply for a deed in lieu. But it is totally their discretion whether they will accept it or not.
Thanks,
Jerry
I HAVE CONSTRUCTION LOAN INEREST ONLY LOAN. THE HOUSE IS NEW BUT NOT SELLING. I NEED TO GET OUT NOW AND CUT MY LOSS'S. DO YOU THINK THIS IS THE BEST WAY OUT? PS THE HOUSE HAS BEEN 4 SALE FOR 18 MONTHS AND I CAN NOT AFORD TO DO THIS ANYMORE.
Hi ROLF
As far as I know, you will be able to go for a deed in lieu with your construction loan. But it will be the lender's discretion whether he will accept it or not. You should immediately contact your lender and speak to him about your hardship. But you should note that a deed in lieu foreclosure will affect your credit and lower your credit score by around 250 points.
Thanks.
As far as I know, you will be able to go for a deed in lieu with your construction loan. But it will be the lender's discretion whether he will accept it or not. You should immediately contact your lender and speak to him about your hardship. But you should note that a deed in lieu foreclosure will affect your credit and lower your credit score by around 250 points.
Thanks.
I have a mobile home i cant afford, I own a house but need to try to do deed in lieu of foreclosure. I am not late on payments the mobile home was damaged by hurricane ike and I do have a 26,000.00 check made payable to me and mortgage co. how do I start process and can Ins check maybe help me bargain with them? Payoff is 55,000.00 Bought this mobile home new in 1997 and it was fixed rate but simple loan which accrues interest daily.. it will never be paid off any suggestions.... terri
Hi Terri,
If you can afford to lose the mobile home that you have, then you can apply for a deed in lieu foreclosure. But as you have mentioned that you are current on your payments, I don't think the lender will agree for a deed in lieu. Normally lenders agree on a deed in lieu foreclosure when the borrower has defaulted the payments.
Thanks,
Jerry
If you can afford to lose the mobile home that you have, then you can apply for a deed in lieu foreclosure. But as you have mentioned that you are current on your payments, I don't think the lender will agree for a deed in lieu. Normally lenders agree on a deed in lieu foreclosure when the borrower has defaulted the payments.
Thanks,
Jerry
what happens if you have other property when you do the deed in lieu of foreclosure? Does the lender have the right to come after the other property?
Hi nathalietamas,
In a deed in lieu foreclosure, the lender forgives the deficient amount. In that case, the lenders will not come after your other properties. But you will have to pay taxes on the forgiven amount as it will be considered your income.
In a deed in lieu foreclosure, the lender forgives the deficient amount. In that case, the lenders will not come after your other properties. But you will have to pay taxes on the forgiven amount as it will be considered your income.