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.
Posted on: 10th Apr, 2004 03:58 am
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 A. Reyes,
If you are keen on keeping the property, a loan modification is a good option. It can help you manage your mortgage better as it can make your monthly payments affordable. Thus you can continue paying the mortgage at an affordable and keep the property.
But if you don't want to keep the property, you can go for a short sale instead of a full-fledged foreclosure and save some valuable credit scores. A short sale hurts your credit by only 75-100 points as compared to 250 of more points in case of a forclosure. But, you may be required to pay the deficient amount arising out of the sale of the house. However, loan modification would definitely be a better option, provided you can afford it.
Thanks,
Jerry
If you are keen on keeping the property, a loan modification is a good option. It can help you manage your mortgage better as it can make your monthly payments affordable. Thus you can continue paying the mortgage at an affordable and keep the property.
But if you don't want to keep the property, you can go for a short sale instead of a full-fledged foreclosure and save some valuable credit scores. A short sale hurts your credit by only 75-100 points as compared to 250 of more points in case of a forclosure. But, you may be required to pay the deficient amount arising out of the sale of the house. However, loan modification would definitely be a better option, provided you can afford it.
Thanks,
Jerry
We own a business. If we do a deed in lieu can the government attach anything to the business? We have 11 properties, and can only keep one...
Hi Shell,
As far as I know, a deed in lieu is applicable only to a real estate property, not to any business entity. If you intend to do a deed in lieu for your real estate properties, you can surely do that. I don't think the govt. will put a lien on your business in you do deed in lieu for your real estate properties. Moreover, in deed in lieu the deficient amount is forgiven and no lien is attached to your property.
As far as I know, a deed in lieu is applicable only to a real estate property, not to any business entity. If you intend to do a deed in lieu for your real estate properties, you can surely do that. I don't think the govt. will put a lien on your business in you do deed in lieu for your real estate properties. Moreover, in deed in lieu the deficient amount is forgiven and no lien is attached to your property.
CAN'T PAY MTG. PUTTING HOUSE ON MKT PRIOR TO APPLYING FOR DEED IN LIEU OF FORECLOSURE. MUST I LIVE IN THE HOUSE WHILE IT IS ON THE MARKET
HOW MANY MONTHS DO YOU MISS BEFORE FORECLOSURE BEGINS
HOW MANY MONTHS OF UNPAIN MTG BEFORE FORECLOSURE BEGINS
Hi MARSHA,
I don't think you will have to stay in the house while it is up for sale in the market. Usually, if you miss payments for 3 consecutive months, the lender starts the foreclosure process on the property.
I don't think you will have to stay in the house while it is up for sale in the market. Usually, if you miss payments for 3 consecutive months, the lender starts the foreclosure process on the property.
can you get adil with a second on the property
Hi anonymous,
You can get a deed in lieu on the first mortgage. I don't think getting a deed in lieu on the second will be possible.
You can get a deed in lieu on the first mortgage. I don't think getting a deed in lieu on the second will be possible.
I currently have experienced a drop in my earnings and my wife is out of work. We are currently one month behind going on 2 months at the end of March. When should we start on trying to get a DIL? Also during the DIL do you have to put the property on the market for 90 days? If so will the forecloser come before I can get the DIL completed?
can the second mortgage lender successfully foreclose on a property, when the first mortgage lender is current
What is the penalty i will have to pay if i go with a deed in lou of forclosure? will i have to come up with the rest of the money if the house does not sell for what the debt is owed?
Hi Tinybuns,
If you go for a deed in lieu, you do not have to pay the deficient amount arising out of the sale of the house. The difference would be forgiven by the lender. However, this will hurt your credit almost as much as a foreclosure will do.
Thanks,
Jerry
If you go for a deed in lieu, you do not have to pay the deficient amount arising out of the sale of the house. The difference would be forgiven by the lender. However, this will hurt your credit almost as much as a foreclosure will do.
Thanks,
Jerry
I am not sure how this factors in with my situation but the Deed in Lieu I have been offered requires me to repay $12k over 100 months. FYI -- according to Wells Fargo, this requirement is from the Mortgage Insurance company.
Be wise and try to do as much homework as possible-you can see from this and numerous other sites that answers vary and you may have to dig really deep to get the "right" answer. I even spoke with a HUD/FHA certified credit counselor and they could not speak to the exact credit implications.
Be wise and try to do as much homework as possible-you can see from this and numerous other sites that answers vary and you may have to dig really deep to get the "right" answer. I even spoke with a HUD/FHA certified credit counselor and they could not speak to the exact credit implications.
Hi
This does vary from one lender to another. But, generally, you are not supposed to pay the deficient amount in case of a deed in lieu. However, if it is a short sale, you will have to pay the deficient amount. Thus one really has to check with one's individual lender to know about the implications of either a deed in lieu or a short sale.
This does vary from one lender to another. But, generally, you are not supposed to pay the deficient amount in case of a deed in lieu. However, if it is a short sale, you will have to pay the deficient amount. Thus one really has to check with one's individual lender to know about the implications of either a deed in lieu or a short sale.