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 dalypinky,
If you are already delinquent on your payments, then you can apply for a deed in lieu to the lender. But a deed in lieu will ruin your credit score and lower it by 250 points. Moreover as the deficient amount resulting from the sale of the property is forgiven, the IRS will charge taxes on this forgiven amount. To know more about deed in lieu, check out the following link:
http://www.mortgagefit.com/deed-lieu.html
If you are already delinquent on your payments, then you can apply for a deed in lieu to the lender. But a deed in lieu will ruin your credit score and lower it by 250 points. Moreover as the deficient amount resulting from the sale of the property is forgiven, the IRS will charge taxes on this forgiven amount. To know more about deed in lieu, check out the following link:
http://www.mortgagefit.com/deed-lieu.html
I own a home in NJ. I am renting right now ,renters r behind and i am 3 months behind in payments. I have moved to Ca. working 0on min wage, my husband died ,i have absolutely no money in the bank or otherwise,Even i am behind on my Ca rent now. and all bills too. what should i do. just go ahead with the foreclosure or try for deed in lieu ? Do i need to file for BK too? I have no clue ,i really need some advice
Hi mita,
You should first try for a deed in lieu. Write a hardship letter to the lender informing him about your hardship. If the lender does not accept the deed in lieu, then you can go for foreclosure.
You should first try for a deed in lieu. Write a hardship letter to the lender informing him about your hardship. If the lender does not accept the deed in lieu, then you can go for foreclosure.
DO I need a lawyer to file for a DIL? I placed my townhouse for sale in the market and the 90 days is up - what should be my next steps? Please help...
Hi Zee,
Did you write a hardship letter to the lender and applied for a deed in lieu? Once the lender accepts your hardship letter and your request for a deed in lieu, he will tell you what next steps you need to take. You can always take the help of an attorney. He/she will be able to help you in understanding the documents that will be given to you by your lender.
Thanks
Did you write a hardship letter to the lender and applied for a deed in lieu? Once the lender accepts your hardship letter and your request for a deed in lieu, he will tell you what next steps you need to take. You can always take the help of an attorney. He/she will be able to help you in understanding the documents that will be given to you by your lender.
Thanks
We purchased property as investment We want to know if after going through the deed in lieu, can the bank collect the difference after seling property? The property is in Florida.
Thank You
Thank You
Hi Kamila,
As it's a deed in lieu, the lender will not collect the deficient amount from you. The deficient amount will be forgiven but you should note that you will have to pay taxes on this forgiven amount.
Thanks
As it's a deed in lieu, the lender will not collect the deficient amount from you. The deficient amount will be forgiven but you should note that you will have to pay taxes on this forgiven amount.
Thanks
I live in CO, but own a house in UT which we were unable to sell before moving. It has lost significant value. We owe 280,000 but same house in neighborhood is on short sale for 199,000. If we did DIL of foreclosure, will we owe the difference between actual value and loan amt?
Hi Luisa,
In a deed in lieu, the lender forgives the deficient amount resulting from the sale of the property. So you will not owe anything to the lender. But you should note that you will have to pay taxes on that forgiven amount.
Thanks
In a deed in lieu, the lender forgives the deficient amount resulting from the sale of the property. So you will not owe anything to the lender. But you should note that you will have to pay taxes on that forgiven amount.
Thanks
I would like a loan modification rather than a foreclosure. I can I do that.
Can you use a deed in lieu of foreclosure on a mortgage on a residential lot?
Hi!
Welcome to forums!
To Marilyn,
You can contact your lender and check out if he agrees to a loan modification or not. In order to get a loan modification, you will have to be delinquent on your payments.
To keyfla,
Yes, deed in lieu foreclosure is available on a residential lot. You can contact your lender and apply for a deed in lieu. If the lender is convinced by your hardship, he will accept your request.
Feel free to ask if you have further queries.
Sussane
Welcome to forums!
To Marilyn,
You can contact your lender and check out if he agrees to a loan modification or not. In order to get a loan modification, you will have to be delinquent on your payments.
To keyfla,
Yes, deed in lieu foreclosure is available on a residential lot. You can contact your lender and apply for a deed in lieu. If the lender is convinced by your hardship, he will accept your request.
Feel free to ask if you have further queries.
Sussane
I have a rental home ( bad investment property).Option arm loan ,well of course my initial idea like everybody else was to keep for a year or so and flip ,put the the profit against my personal residence that I paid too much for.
Can I just walkaway for the rental home ,give to the bank??What are the consequences.I can't afford to keep it(my work has slowed to about 50%).
The chances of renting it are slim ,can't get enough to cover the note.
Can I walk away ? how do I do that.
Jon
Can I just walkaway for the rental home ,give to the bank??What are the consequences.I can't afford to keep it(my work has slowed to about 50%).
The chances of renting it are slim ,can't get enough to cover the note.
Can I walk away ? how do I do that.
Jon
Hi Jon,
Walking away from the property is not a good option. If you walk away from the property, the lender will have the right to foreclose the property. If the lender forecloses the property, it will badly affect your credit score. Your credit score will be lowered by 250 points. Apart from this, the lender will have the right to place lien on your other property if the foreclosure sale does not satisfy the loan.
In my opinion, you should speak to the lender about your hardship and apply for a deed in lieu or short sale. If you want to save your credit, short sale is the best option.
Take Care.
Walking away from the property is not a good option. If you walk away from the property, the lender will have the right to foreclose the property. If the lender forecloses the property, it will badly affect your credit score. Your credit score will be lowered by 250 points. Apart from this, the lender will have the right to place lien on your other property if the foreclosure sale does not satisfy the loan.
In my opinion, you should speak to the lender about your hardship and apply for a deed in lieu or short sale. If you want to save your credit, short sale is the best option.
Take Care.
Do you have to wait until you are in a default situation until you can call the lender and talk about a deed in lieu? What if you are up-to-date on your mortgage payments, but want to give the property back to the bank? Thanks!