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?
what is the process of doing a deed in lieu with a 2nd?
hi paul,
you can do a deed in lieu of foreclosure on your first loan. to do that you need to send the lender a hardship letter stating what difficulties you are facing at present and why you would want a deed in lieu. however, with a second mortgage on the property, the first lender might not be ready to do a dil. you need to talk with the loss mitigation department and negotiate with them.
you can do a deed in lieu of foreclosure on your first loan. to do that you need to send the lender a hardship letter stating what difficulties you are facing at present and why you would want a deed in lieu. however, with a second mortgage on the property, the first lender might not be ready to do a dil. you need to talk with the loss mitigation department and negotiate with them.
I keep hearing that the bank probably wont come after the difference in a short sale. You keep saying that they will. If I'm 100,000 underwater, why would I want a short sale? Is saving my credit worth 100 grand? DIL seems like it would be a better option if they wave the deficiency. I don't know who do believe either.
Hi joe,
In case of short sale, the lender has the right to sue you for the deficient amount or charge off the deficient amount. However, if the lender is convinced that your financial situation is bad and you won't be able to pay the deficient amount, then the lender may forgive it. This will depend upon the discretion of the lender.
In case of a deed in lieu, the lender will not ask for the deficient amount. But, the credit score in deed in lieu is lowered by 250 points. If you are not concerned about your credit score, then you can definitely go for deed in lieu.
Take care.
In case of short sale, the lender has the right to sue you for the deficient amount or charge off the deficient amount. However, if the lender is convinced that your financial situation is bad and you won't be able to pay the deficient amount, then the lender may forgive it. This will depend upon the discretion of the lender.
In case of a deed in lieu, the lender will not ask for the deficient amount. But, the credit score in deed in lieu is lowered by 250 points. If you are not concerned about your credit score, then you can definitely go for deed in lieu.
Take care.
I have'nt have tenants for over 5 months now. My husband lost hours of work and i don't thing that i can keep up with the payments. Do you think that Deed in Lieu is a good option for me
Welcome yesenia,
If you have defaulted the loan, then you can definitely apply for a deed in lieu. However, you would lose your home in this process and your credit score will also get tarnished. In my opinion, you should try for a loan modification which will help you in saving your property.
If you have defaulted the loan, then you can definitely apply for a deed in lieu. However, you would lose your home in this process and your credit score will also get tarnished. In my opinion, you should try for a loan modification which will help you in saving your property.
We have a rental home in Ga that we had a short sale offer on. Wells fargo lost our paperwork that was faxed and then UPS's to them 3 times. They then lost the realtors faxes 3 times too in Fort Mills. The potetial buyer walked. We have managed to hold off for two more months. but still no job for hubby and his unemployment has about 9 weeks left. We can not make the difference between the payment and the rent check any more. Other debt is piling up so we have requested a deed in lieu of. I am very concerned that we can not pay the bills we have let alone wells fargo wanting more? I am so angry with them over this, which is a long story covering a botch appraisal on their part... but there is little that we can do about that. Our credit score has been close to 800 for years, and now we are wiped out, and facing Fort Mills endless paper loss. My first question is how long does it take, what do I do with the rent checks during this time frame, and is anyone else going after banks like Wells Fargo that refuse to work with you after taxpayers bailed them out?
The home we requested the dil is located in GA. it was our principal home, but when we could not sell it we rented it out. We have be MO residence for over a year now. How will this effect us? From what I heave read onthe internet GA generally doesn't do dil, but will they if you dont live in that state?
So to start the process for deed in leiu I need to write a hardship letter to the lender, and if i have been currently making my payments and may be able to for the next couple months should i stop making them now so I can show a hardship easier
Hi,
To sharercs,
You need to contact your lender and check it out with him whether he would accept your deed in lieu request or not. You will have to write a hardship letter to the lender for that. As far as the tenants are concerned, you can inform them that you are planning for a deed in lieu and give them time to move out of the property. As you have rented it out, your principle property has been converted to a investment property. However, you should note that a deed in lieu will lower your credit by 250 points.
To anon matt,
Yes, you'll have to write a hardship letter to the lender to start the process of deed in lieu. You need to convince your lender about your hardship. Moreover, the lender will check your financial situation before approving the deed in lieu. If the lender finds that you intentionally stopped the payments, I dont think he would accept your deed in lieu.
To sharercs,
You need to contact your lender and check it out with him whether he would accept your deed in lieu request or not. You will have to write a hardship letter to the lender for that. As far as the tenants are concerned, you can inform them that you are planning for a deed in lieu and give them time to move out of the property. As you have rented it out, your principle property has been converted to a investment property. However, you should note that a deed in lieu will lower your credit by 250 points.
To anon matt,
Yes, you'll have to write a hardship letter to the lender to start the process of deed in lieu. You need to convince your lender about your hardship. Moreover, the lender will check your financial situation before approving the deed in lieu. If the lender finds that you intentionally stopped the payments, I dont think he would accept your deed in lieu.
Can you get a loan modification on a rental property?
Hi Tanders,
As far as I know, you can modify your loan for the rental property.
As far as I know, you can modify your loan for the rental property.
I lost my job about 6 weeks ago and am now going on my second missed mortgage payment. Truthfully, I never should have gotten into the condo that I have now (interest-only, 100% financing). It's about $80k upside-down. I don't intend to stay in it.
Are there any other options other than DIL or is this my best course? I know that my credit will be hit, but I have to accept that.
Thank you for all your support and advice!
Are there any other options other than DIL or is this my best course? I know that my credit will be hit, but I have to accept that.
Thank you for all your support and advice!
Hi Arnold,
In your situation, I think the deed in lieu is the best option. Though your credit score will get lowered by 250 points, you'll not have to pay the deficient amount resulting from the sale of the property. Moreover, depending upon your state laws, you will not have to pay the taxes on the forgiven amount.
Thanks
In your situation, I think the deed in lieu is the best option. Though your credit score will get lowered by 250 points, you'll not have to pay the deficient amount resulting from the sale of the property. Moreover, depending upon your state laws, you will not have to pay the taxes on the forgiven amount.
Thanks
My husband and I purchased a condo within a gated community that has bilaws bigger than my bible and states that only 55+ can dwell in any of the condos. My husband recently past away in February and I found out that my name does not appear on the note, but does appear on the mortgage and deed. I am having trouble with the loan officer in that he is not working with me. The only income I have now is social security, I have lost my husbands social security and pension and I find myself unable to pay the monthly bills let alone the mortgage on the condo. I do not have the money to pay for the condo and my daughter is not allowed to move in with me to help with the mortgage payment (she is not 55). So I find myself in a perdicament. What is my best option, I do not want this following me to my death.