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 Colton,
Welcome to the forums.
Since you couldn't sell property in the past 2 years and have also refinance quite a number of times, I believe you should go for deed-in-lieu provided you feel that you cannot pay off the loan. But have a talk with the lender on this regard.
Thanks,
Sara
Welcome to the forums.
Since you couldn't sell property in the past 2 years and have also refinance quite a number of times, I believe you should go for deed-in-lieu provided you feel that you cannot pay off the loan. But have a talk with the lender on this regard.
Thanks,
Sara
From my experience most banks
like for the property to be on the market and attempt to do a short sale prior to a deed in lieu. The process is generally 90 days. That is why it is important that you weigh your options and act quickly. It depends on what state you live in on how fast the sheriff sale date is set.
like for the property to be on the market and attempt to do a short sale prior to a deed in lieu. The process is generally 90 days. That is why it is important that you weigh your options and act quickly. It depends on what state you live in on how fast the sheriff sale date is set.
"From my experience most banks
like for the property to be on the market and attempt to do a short sale prior to a deed in lieu."
I agree with you. They do prefer a short sale instead of a DIL as it means fast cash back into their coffers. A dead property which is hard to sell is the last thing the lender would like to have in his portfolio.
Derek Powazek
like for the property to be on the market and attempt to do a short sale prior to a deed in lieu."
I agree with you. They do prefer a short sale instead of a DIL as it means fast cash back into their coffers. A dead property which is hard to sell is the last thing the lender would like to have in his portfolio.
Derek Powazek
I have a question
I've read the entire thread but I'm still confused. Do I just call the bank and ask for a deed in lieu? My husband are I are both 24 and thought life was going great, but buying this house has been the worst mistake we ever made. We're broke, the furnace is broke(winter in MI) and the neighrborhood has dratically declined.
We haven't been able to pay since Nov. 2006.
I currently have a mortgage with EMC that we can no longer pay because of my husband's multiple sclerosis. I've called various investors to try to sell the house but no one was interested. We owe about 71,000 on the loan, however house in my area comparable to mine are only selling for like 65,000. Before you do a deed in lieu do you have to try to prove you tried to sell the house, because absolutely no on is interested in buying our house and we just want out of the house like yesterday. The hosue is in my husbands name only. Is there a form I can download online I can mail to them.
We haven't been able to pay since Nov. 2006.
I currently have a mortgage with EMC that we can no longer pay because of my husband's multiple sclerosis. I've called various investors to try to sell the house but no one was interested. We owe about 71,000 on the loan, however house in my area comparable to mine are only selling for like 65,000. Before you do a deed in lieu do you have to try to prove you tried to sell the house, because absolutely no on is interested in buying our house and we just want out of the house like yesterday. The hosue is in my husbands name only. Is there a form I can download online I can mail to them.
Hi Jennifer,
Welcome to the forums.
You are indeed passing through a tough time. But have faith in God. Let's hope that things will turn out well for you.
Anyway, you can call up the mortgage company and request them for a deed-in-lieu. By this process, you hand over the property to the company. The company officials will sell it and if they get a lower price than the outstanding debt, then the mortgage company may or may not ask for the deficit amount.
Depending upon the state laws the loan company may also sue you for a judgment on the deficit amount. But in your situation, it is better if you can stay away from such legal issues.
It will be a good option to look out for a real estate agent and sell your property. Considering the sale price in your neighborhood, I guess you will be getting a moderate price for your home.
Thanks,
Sara
Welcome to the forums.
You are indeed passing through a tough time. But have faith in God. Let's hope that things will turn out well for you.
Anyway, you can call up the mortgage company and request them for a deed-in-lieu. By this process, you hand over the property to the company. The company officials will sell it and if they get a lower price than the outstanding debt, then the mortgage company may or may not ask for the deficit amount.
Depending upon the state laws the loan company may also sue you for a judgment on the deficit amount. But in your situation, it is better if you can stay away from such legal issues.
It will be a good option to look out for a real estate agent and sell your property. Considering the sale price in your neighborhood, I guess you will be getting a moderate price for your home.
Thanks,
Sara
a close friend found a house being the big hearted guy i am i signed the papers then she was late on payments and eventually got married and split i got stuck with the house and the mortage company accepted the deed in lieu how bad wil my credit get and what is the perctange of taxes they have you pay along with the deed in lieu
I bought an investment property about six months ago. The property is rented but I still can't afford the mortgage payments because I lost my job. What would happen to the tenants if decide to do a deed in lieu of foreclosure?
Right now I am paying rent at my home close to my job, and my mortgage payment as well for my previous house further away. I can't sell my house. It has been on the market for some time with not even a showing, and my asking price I have is just looking to break me even. I am curious if a deed-in-lieu would be acceptable to my lender as I have been making all the payments. I have only been able to survive paying both by living off credit cards.
Hi Eric,
Welcome to Mortgagefit discussion board.
Get in touch with the lender and tell him all about it. Lender can accept your request to take over the house by way of deed in lieu of foreclosure. But as the market is not good I can't say if he will agree to it.
Why don't you try to rent it out so that until you get a buyer at least you have some income available to help you financially?
Thanks
Blue
Welcome to Mortgagefit discussion board.
Get in touch with the lender and tell him all about it. Lender can accept your request to take over the house by way of deed in lieu of foreclosure. But as the market is not good I can't say if he will agree to it.
Why don't you try to rent it out so that until you get a buyer at least you have some income available to help you financially?
Thanks
Blue
"Right now I am paying rent at my home close to my job, and my mortgage payment as well for my previous house further away. I can't sell my house. It has been on the market for some time with not even a showing, and my asking price I have is just looking to break me even. I am curious if a deed-in-lieu would be acceptable to my lender as I have been making all the payments. I have only been able to survive paying both by living off credit cards."
Foreclosure is also quite expensive and time consuming thing for a lender to pursue.
So if you can show enough reason that within the next month or so you will have to stop the payments because of financial strains, then lender would agree to accept a deed in lieu of foreclosure.
Foreclosure is also quite expensive and time consuming thing for a lender to pursue.
So if you can show enough reason that within the next month or so you will have to stop the payments because of financial strains, then lender would agree to accept a deed in lieu of foreclosure.
My husband lost his job and I accepted a job in a different city, we can not make the house payment. WE purchased the home in may 08 and had to make unexpected repairs that hurt us financially. We can not afford to pay for child care and will live with my parents. Should we purchase a much needed car to get to work before seeking the above. thanks
Julie, deed in lieu of foreclosure will cause a drop in your credit score and make it difficult to get a car loan.
If there is no way other than a deed in lieu then I suggest that purchase the car first before approaching the mortgage lender about the dil.
Miller
If there is no way other than a deed in lieu then I suggest that purchase the car first before approaching the mortgage lender about the dil.
Miller
Hi Julie,
It's good to hear that you got a job as it was really needed. Now, if you go for a deed in lieu, you will have to pay the deed tax and will also get a negative effect on your credit score. And with a lower credit score, you may not be able to qualify for any loan in future. So think twice before you go for a deed in lieu.
And when you decide to purchase a car, you should very well consider your financial stability. If at present you are lacking of monetary power, then you should not think of buying the car right now. I suggest you to wait for some time and gather the much needed cash to purchase the car later.
For now, you should talk to the lender and ask him for some alternative repayment plan. I am sure he will find a solution for you.
It's good to hear that you got a job as it was really needed. Now, if you go for a deed in lieu, you will have to pay the deed tax and will also get a negative effect on your credit score. And with a lower credit score, you may not be able to qualify for any loan in future. So think twice before you go for a deed in lieu.
And when you decide to purchase a car, you should very well consider your financial stability. If at present you are lacking of monetary power, then you should not think of buying the car right now. I suggest you to wait for some time and gather the much needed cash to purchase the car later.
For now, you should talk to the lender and ask him for some alternative repayment plan. I am sure he will find a solution for you.
I am considering a DIL on a house I moved out of and no luck selling for 1 yr. I am tired of carrying 2 mortgages and the $ is running out. The house last appraised for $370k and I owe $295. Is a DIL a possible route in this scenario. Renting the house would not cover the mortgage in this area. With this equity would the bank still hit me on the credit?