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 Jahrmann,
Generally lenders do not accept a deed in lieu if you are current on your mortgage payments. However, you can definitely speak to the lender and try to negotiate with him so that he accepts a deed in lieu.
Thanks
Generally lenders do not accept a deed in lieu if you are current on your mortgage payments. However, you can definitely speak to the lender and try to negotiate with him so that he accepts a deed in lieu.
Thanks
I'm in the process of the deed in lieu. My lender told me that I'd be receiving a 1099, which is income that I'm going to have to file next year. Why is that? I lost money on the house and now I have to claim income on the property?
My parents are in their mid 80's and have found themselves in a negative amortization with no equity. They are moving into a retirement home out of state and can't sell their home. What will happen if they just walk away?
Their credit is not a concern at this point.
Their credit is not a concern at this point.
Hi,
To Lyn,
In the process of deed in lieu, the lenders forgive the deficient amount resulting from the sale of the property. This is considered as your income by the IRS and thus you need to pay taxes on it.
To lou,
If they walk away from the property, the lender will foreclose the property. The lender will claim the deficient amount resulting from the sale of the property. If they cannot pay the deficient amount, the lender may place lien on their other property.
Thanks
To Lyn,
In the process of deed in lieu, the lenders forgive the deficient amount resulting from the sale of the property. This is considered as your income by the IRS and thus you need to pay taxes on it.
To lou,
If they walk away from the property, the lender will foreclose the property. The lender will claim the deficient amount resulting from the sale of the property. If they cannot pay the deficient amount, the lender may place lien on their other property.
Thanks
how does a deed in lieu of foreclosure affect a second mortgage or lein?
Wouldn't the Mortgage forgivness Debt Relief Act prevent youu from having to pay taxes on a Deed in Lieu?
Hi,
To worried!
Though your first lender accepts deed in lieu, you will still be liable to pay off the second lender's dues. If you do not pay the dues, he will have the right to charge off the dues to a collection agency who will in turn collect the dues from you.
To Dara!
Yes, depending upon your state laws, you will get tax relief due to the Mortgage Forgiveness Debt Relief Act.
Sussane
To worried!
Though your first lender accepts deed in lieu, you will still be liable to pay off the second lender's dues. If you do not pay the dues, he will have the right to charge off the dues to a collection agency who will in turn collect the dues from you.
To Dara!
Yes, depending upon your state laws, you will get tax relief due to the Mortgage Forgiveness Debt Relief Act.
Sussane
How does deed in lieu affect crdit scores compared to bankruptcy?
Hi anonymouskc,
In deed in lieu of foreclosure, your credit score will go down by 250 points whereas in bankruptcy, it will go down by 200-250 points. However, in deed in lieu, the deficient amount resulting from the sale of the property will be forgiven.
Thanks
In deed in lieu of foreclosure, your credit score will go down by 250 points whereas in bankruptcy, it will go down by 200-250 points. However, in deed in lieu, the deficient amount resulting from the sale of the property will be forgiven.
Thanks
Hi Jessica:
I own an investment property that is now worth less than half what we paid for it. We have a 5/1 interest only mortgage that will begin adjusting in about a year. Our tenants just moved out and we will have to spend some additional $$ to get the house ready to rent again. We were breaking even on it previously, but if the payments go up, we will end up losing even more money.
We had been current on the payments, but stopped to get the bank to possibly negotiate with us. We are now 2 months behind. At this point, it seems to make sense to try and walk away from the property rather than putting additional money into it (throwing good money after bad). Sounds like a deed in lieu would be the way to try and do this if the bank will take the property back. I realize this will hurt my credit.
Is a deed in lieu really the best option or should we do something else?
Thanks!
I own an investment property that is now worth less than half what we paid for it. We have a 5/1 interest only mortgage that will begin adjusting in about a year. Our tenants just moved out and we will have to spend some additional $$ to get the house ready to rent again. We were breaking even on it previously, but if the payments go up, we will end up losing even more money.
We had been current on the payments, but stopped to get the bank to possibly negotiate with us. We are now 2 months behind. At this point, it seems to make sense to try and walk away from the property rather than putting additional money into it (throwing good money after bad). Sounds like a deed in lieu would be the way to try and do this if the bank will take the property back. I realize this will hurt my credit.
Is a deed in lieu really the best option or should we do something else?
Thanks!
hi saltman,
at this point deed-in-lieu seems to be the best option. refinance doesn't necesarily increase your monthly payments, but if you are trying to do a cash-out refinance the payments can go up. a deed-in-lieu can stop the foreclosure, but it hurts your credit almost as much as a foreclosure does, dropping your credit by approximately 250 points.
if you want to keep the property, you can go for loan modification which can save you some valuable credit score and it can also reduce your monthly payments. however, you need to send the lender a hardship letter, convince them about your difficulties in making the payments and negotiate with them for a lower rate.
thanks,
jerry
at this point deed-in-lieu seems to be the best option. refinance doesn't necesarily increase your monthly payments, but if you are trying to do a cash-out refinance the payments can go up. a deed-in-lieu can stop the foreclosure, but it hurts your credit almost as much as a foreclosure does, dropping your credit by approximately 250 points.
if you want to keep the property, you can go for loan modification which can save you some valuable credit score and it can also reduce your monthly payments. however, you need to send the lender a hardship letter, convince them about your difficulties in making the payments and negotiate with them for a lower rate.
thanks,
jerry
What are the pros and cons to a foreclosure vs. a "deed in lui of" for an investment property? How much worse can the foreclosure affect me?
I am severely underwater on my mortgage and have to move. Is a short sale much better than DIL? I've been trying for a short sale for about 4 months and had one buyer walk away because the approval took so long. I haven't been making any payments, and was wondering if DIL would be better for my credit because I won't show as many missed payments.
Hi Joseph,
A short sale will be less damaging for your credit than a deed-in-lieu. In case of a short sale your credit is lowered by almost 75-100 points. In compaison, a deed-in-lieu of foreclosure will hurt your credit by 250 points. In a deed-in-lieu, however, you will be forgiven the deficiency amount of the loan, while if you short sale you are required to pay that amount.
A short sale will be less damaging for your credit than a deed-in-lieu. In case of a short sale your credit is lowered by almost 75-100 points. In compaison, a deed-in-lieu of foreclosure will hurt your credit by 250 points. In a deed-in-lieu, however, you will be forgiven the deficiency amount of the loan, while if you short sale you are required to pay that amount.
Hello! There is no way to avoid any deficiency judgment? Are you always liable? I lost my job in NC and found another in FL; wife does not work (still looking) and I am trying to keep both payments, mortgage and rent while I sell my home up in North Carolina. I don't know for how long I could keep mortgage payments. What would be your recommendations either foreclosure or try to modify the loan! I do have a 1st and 2nd mortgage. Thanks for any ideas!!