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 Mitzie,
If you are facing hardship in paying off the mortgage, then I would suggest you to contact your lender and inform him about it. If you do not wish to save the property, you can request the lender for a deed in lieu. In this process, though your credit will be effected but you will not be liable to pay the deficient amount.
Thanks
If you are facing hardship in paying off the mortgage, then I would suggest you to contact your lender and inform him about it. If you do not wish to save the property, you can request the lender for a deed in lieu. In this process, though your credit will be effected but you will not be liable to pay the deficient amount.
Thanks
Do bank of America accept deed in lieu if they own both loan (Ist &2nd)? Did any body deal with bofa?
Hi Guest!
Welcome to forums!
Frankly speaking, I haven't dealt with BofA. However, as per my knowledge, the lender will accept a deed in lieu only on one of the loans. As far as the second loan is concerned, you'll either have to pay it off or the lender will charge it off. Once the lender charges it off, a third party collection agency will collect the dues from you.
Feel free to ask if you have further queries.
Sussane
Welcome to forums!
Frankly speaking, I haven't dealt with BofA. However, as per my knowledge, the lender will accept a deed in lieu only on one of the loans. As far as the second loan is concerned, you'll either have to pay it off or the lender will charge it off. Once the lender charges it off, a third party collection agency will collect the dues from you.
Feel free to ask if you have further queries.
Sussane
i bought a brand new modular home and placed it on a full basement on 1.4 acres that i bought back in 2001. currently, there is a electrical substation being built 60 yards from our property and a 138,000 kv high voltage power line now running 73 feet from our front door of our house. the substation and high powerline presents two things, significant depreciation of our property value and a risk to my family's health, especially our child who is 32 days old. we strongly feel that we shall not put our child at risk by continuing to reside here and continue to pay on a house that is now worth half as much. we owe approximately 130k, which 40k of it is from a second mortgage. what can you advise me to do in this situation? i am concerned about my credit, but my family's health outweighs my credit score.
Hi bobby,
Deed in lieu of foreclosure is a good option to get rid of the property. However, the lenders accept a deed in lieu when you are delinquent on your payments. I would suggest you to write a hardship letter to your lender and request for it. However, it would be the lender's decision whether he would accept it or not.
Deed in lieu of foreclosure is a good option to get rid of the property. However, the lenders accept a deed in lieu when you are delinquent on your payments. I would suggest you to write a hardship letter to your lender and request for it. However, it would be the lender's decision whether he would accept it or not.
I applied for deed in lieu for two investment properties in Orlando, Florida. Can you please tell any attorny that can work with my lenders so that I can get letter of debt is canceled and the other which refers to the waiver of the right to a deficiency judgment.
Hi Sohail,
You can contact any attorney to work with your lender. However, in a deed in lieu, the deficient amount is forgiven by the lender. So I do not think that the lender would give you a separate letter stating that the deficient amount is forgiven.
Thanks
You can contact any attorney to work with your lender. However, in a deed in lieu, the deficient amount is forgiven by the lender. So I do not think that the lender would give you a separate letter stating that the deficient amount is forgiven.
Thanks
I called Countrywide to request a DIL and they said that my property needs to be listed as a short sale for three months before they would allow it.
If I were to sell it as a short-sale, am I responsible for the difference?
Thanks!
If I were to sell it as a short-sale, am I responsible for the difference?
Thanks!
My husband and I refinanced our house a few years ago. Based on our income at that time we took out equity in our house to remodel our kitchen and add a family room. Two years have passed since then and our income has decreased $32,000. We are still paying our mortgage payment, but each month seems to be getting worse. In February we sent in a modification packet to our mortgage company and still dont have an answer.
Last week I called our mortgage company to see if we qualified for President Obamas Homeowner Affordability and Stability Plan They processed my information over the phone and decided that because our mortgage payment isnt 31% of our gross income we dont qualify (we missed it by 3%). Were hoping to qualify for the mortgage companys modification plan, but were not very hopeful. If we were to apply for a Deed in Lieu do they base their decision on those numbers also or is there more information that they take into account? Do you definitely recommend having a mortgage lawyer look over the paperwork before signing? I understand that it does affect your credit, but how long do you usually have to wait before you can qualify for another mortgage?
Last week I called our mortgage company to see if we qualified for President Obamas Homeowner Affordability and Stability Plan They processed my information over the phone and decided that because our mortgage payment isnt 31% of our gross income we dont qualify (we missed it by 3%). Were hoping to qualify for the mortgage companys modification plan, but were not very hopeful. If we were to apply for a Deed in Lieu do they base their decision on those numbers also or is there more information that they take into account? Do you definitely recommend having a mortgage lawyer look over the paperwork before signing? I understand that it does affect your credit, but how long do you usually have to wait before you can qualify for another mortgage?
Hello good morning. I heve read all your article and questions but I couldn't find the answer for my case. I bought a timeshare property for US$10,000 and paid in full on 2001. I never used the property and stopped paying the annual fees since 2004. The total debt is US$3,000. The company is proposing the warranty deed in lieu of foreclosure. What should I do? What are the other side effects of foreclosure besides credit damage? Will I get the difference between the debt and the sale after that?I'm not a american citizen but I travel a lot to USA. Does a foreclosure affect my status when appying for a visa? Thank you very much! Andrew.
I have a mortgage on a manufactured home the payoff is more than then what it is worth. My husband and I split up and he was making the payments I moved on and bought a house. He decided to leave and not tell me so the mortgage is now a payment I have to make along with my own house. The mortgage is in my name. I am afraid I cannot make both mortgage payments. The property is a home and land package deal which is apprasing 20,000 under the payoff. I was thinking about a deed in lieu of foreclosure but how would this effect me. Can the other mortgage company make me sale my house and payoff the loan. I am loosing sleep over this and don't know what to do. There is now things that need fixing before I can consider renting but I hate to have to rent I just want it to go away and if it ruin my credit score that is ok too
I lost my job recently due to layoffs and I'm entering the military as a result of the job loss. I'm one month behind on my mortgage and have had the property on the market for 90 days. I just started the deed in lieu process and I want to know is there any danger in having other property reposessed to satisfy the debt once deed in lieu has finished?
Hi Rich,
If there are 2 separate properties, then you can complete the deed in lieu for one property and then let another property be repossessed. I don't think there would be any problem.
If there are 2 separate properties, then you can complete the deed in lieu for one property and then let another property be repossessed. I don't think there would be any problem.
i have a 1st and also a HELOC...we have to give our home back..can i do a deed in lieu?
Welcome guss,
You can apply for a deed in lieu with your first lender and try to sell off the property. However, you'll still be liable for the HELOC. You'll have to pay off the dues to the lender otherwise the lender will charge off the loan to a collection agency.
You can apply for a deed in lieu with your first lender and try to sell off the property. However, you'll still be liable for the HELOC. You'll have to pay off the dues to the lender otherwise the lender will charge off the loan to a collection agency.