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?
I bought a house for a friend down in florida, we bought it the year of 2006, he was paying for it fine until now, he told me he lost his job and is not able to make anymore payments on it and I have my own apartment here in NJ where I do not make enough for the house in florida, I am now 2 months behind and have placed the home for shortsale - but yet I have not received any offers - I asked the mortgage company for a deed of lieu, I wanted to ask how long does this stay on your credit report? And if with a Deed of Lieu do I have to go bankruptcy? Please help, I am lost and confused.
What are the income tax ramifications of a DIL?
Welcome Stevie,
In deed in lieu foreclosure, as the lender forgives the deficient amount, you will be liable for paying taxes on that forgiven amount.
In deed in lieu foreclosure, as the lender forgives the deficient amount, you will be liable for paying taxes on that forgiven amount.
If the county givea copy of the deed in lieu, can I do a deed in lieu of foareclosure whith it?
can I do a deed in lieu of foreclosure which a copy of title from county where the house is registred?
I heard that deed-in-lieu of foreclosure is a once in a liftetime option. Is this true?
hi,
i currently have a second mortgage on my house because we did 100% finance. i just got orders (military) to germany and we cannot sell the house due to the economy and failing house prices. if i do a deed in lieu of foreclosure, how does that affect my 2nd mortgage?
i currently have a second mortgage on my house because we did 100% finance. i just got orders (military) to germany and we cannot sell the house due to the economy and failing house prices. if i do a deed in lieu of foreclosure, how does that affect my 2nd mortgage?
welcome fugi,
if the first lender goes for a deed in lieu foreclosure, still you will be liable to pay the second mortgage. the second mortgage company will have all the rights to ask you to pay off the dues. if you do not pay it off, they can charge off the loan to a collection agency who will in turn collect the dues from you.
if the first lender goes for a deed in lieu foreclosure, still you will be liable to pay the second mortgage. the second mortgage company will have all the rights to ask you to pay off the dues. if you do not pay it off, they can charge off the loan to a collection agency who will in turn collect the dues from you.
Can you be current in your payments and still do a DIL. Is it worth the credit to keep making payments until the process is over?
Hey rt,
I don't think the lender will agree to do a deed in lieu foreclosure if you are current on your payments. To know more about deed in lieu, check out the following page:
http://www.mortgagefit.com/deed-lieu.html
I don't think the lender will agree to do a deed in lieu foreclosure if you are current on your payments. To know more about deed in lieu, check out the following page:
http://www.mortgagefit.com/deed-lieu.html
hi I live in bend oregon where we have seen our median home value fall fom 398000 to 220000 I have been trying to sell because I would like to move-at this point I'm able to make payments but really want to leave. Can I do a deed in lieu without hardship-I am currently offering it below what I owe-no takers. How do you avoid being taxed to death should the bank sell for some crazy low price like they have been doing? Who helps you through the process. thanks so much
Hi shazam,
Lenders do not agree to a deed in lieu if you are not delinquent on your payments for at least a month. Moreover, the lender will always want to know as to what circumstances led to the non-payment of the debts in your part.
In case you default on your payments and go for a deed in lieu, the deficient amount resulting from the sale of the property will be forgiven by the lender. But you will be taxed on this deficient amount. To know more about deed in lieu, check out the following link:
http://www.mortgagefit.com/deed-lieu.html
Thanks
Lenders do not agree to a deed in lieu if you are not delinquent on your payments for at least a month. Moreover, the lender will always want to know as to what circumstances led to the non-payment of the debts in your part.
In case you default on your payments and go for a deed in lieu, the deficient amount resulting from the sale of the property will be forgiven by the lender. But you will be taxed on this deficient amount. To know more about deed in lieu, check out the following link:
http://www.mortgagefit.com/deed-lieu.html
Thanks
I purchased a house 2 years ago for 518,000, 10% down and have never been late. This new community was never finished and houses are down as much as 33% and still not selling. I have a Small historic hotel and have to make sound business decisions, unlike what the lending institutions have done. Bracing for what may be slower times, I want to eliminate poor investments, one of which is this house. It is my primary concern to protect my business, which has been successful for the past 15 years, and giving the house to the bank and moving into an apt I own makes since even though I will loose what I have invested in the house. I am not destitue yet but I would be if I used the same business practices as those of the lending institutions. Can a deed in Lieu of release me from this property? I am currently in contact with B of A but so far have been told since I am up to date with all payments, they will do nothing. I am trying to be pro-active in heading off problems. Thank you
Hi Larry,
It is good to see you being pro-active and taking steps to save your business. It is true that a bank will not agree to do a deed in lieu or a short sale if you are not delinquent on your payments. You can try listing the property in the market yourself and see if you can get buyers for the property. But you should also remember that if you sell off the property, the lender will call the mortgage due immediately.
Thanks
It is good to see you being pro-active and taking steps to save your business. It is true that a bank will not agree to do a deed in lieu or a short sale if you are not delinquent on your payments. You can try listing the property in the market yourself and see if you can get buyers for the property. But you should also remember that if you sell off the property, the lender will call the mortgage due immediately.
Thanks
I have a home in florida that I will be doing a deed of lieu and I wanted to know how long do I have until I tell my tenants they have to move? My 90 day trial to be posted on the market ends on Feb. 16th, and that is when I will do the deed of lieu - can someone please tell me when I am suppose to inform my tenants to move? Please help...