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?
I'm in the process of a divorce and my spouse does not want to keep the house, nor do I. I will be very stretched making the payments without my spouse's income and will likely not be able to make on-time payments. I have decent credit, and the home payments are current, however the market value is significantly below what is owed on the house due to the 5/1 ARM that was used to finance it and the current market so selling it is not an option. I would like to buy again in a couple of years once I am in a better position.. is a deed in lieu a valid strategy for me?
We have a house in PA that we lived in (only residence at the time) for about 3 years, but my husband's job relocated us to NY (Aug 2008) where we bought another house. We have had the PA house on the market for over a year (since April 2008) and we have not be able to make the payments. We are asking the mortgage company for a deed in lieu due to the situation. My question is would the PA house qualify under the Mortgage Debt Forgiveness Act or not? The mortgage company said we would receive an 1099 for the difference of the appraisal and loan payoff. Any help would be greatly appreciated.
Hi!
Welcome Hutt!
Deed in lieu can be considered as a good strategy but you should note it would be ruin your credit badly. A deed in lieu will lower your credit score by 250 points. If you are confident that you would be able to improve your score before purchasing a new property, then you can go for it.
To anonymous,
I don't think that your house in PA will qualify for the Mortgage Debt Forgiveness Act as it is not your primary residence right now. Though the lender would forgive the deficient amount, you would be liable for pay the taxes on that forgiven amount.
Welcome Hutt!
Deed in lieu can be considered as a good strategy but you should note it would be ruin your credit badly. A deed in lieu will lower your credit score by 250 points. If you are confident that you would be able to improve your score before purchasing a new property, then you can go for it.
To anonymous,
I don't think that your house in PA will qualify for the Mortgage Debt Forgiveness Act as it is not your primary residence right now. Though the lender would forgive the deficient amount, you would be liable for pay the taxes on that forgiven amount.
My husband and I have found ourselves in the economic position. We have contacted a Arizona attorney and he said we need to do a deed in lieu of foreclosure with our bank in Arizona. We own a house in Michigan and some hunting land in upstate Michigan. We have some assets, but not many. What assets, if any, can the bank take away from us besides our Arizona home.
Hi moffit,
If you go for a deed in lieu of foreclosure, the lender won't take any other asset of yours. However, you should note that a deed in lieu foreclosure would lower your credit score by 250 points.
Thanks
If you go for a deed in lieu of foreclosure, the lender won't take any other asset of yours. However, you should note that a deed in lieu foreclosure would lower your credit score by 250 points.
Thanks
Hi, I bought a townhome for $110,000 in 2005, my first home, with an adjustable rate rate of 6.25%..this rate will change in 2010, now i know i won't be able to afford whatever the new rate will be. I haven't tried loan modification as yet because I am wanting to leave my community due to the voilence and neighborhood changing but also to take advantage of the low house prices. I haven't been able to get a buyer not even for $109,900 and my neighbor i see is doing a short sale for $65,000 and no takers. My credit is below 700 but above 670. By the way, the community looks very nice so i know its not aesthetic reasons why no one's buying. Should I do dee-in lieu? and how much do you think my credit will be impacted? what should I do?
My husband and I have never missed a payment, we have owned and lived in our home for over 2 years. Now we find ourselves upside down by more the double. We paid $260 and it is now worth 145, we are thinking of just walking away. Our credit score is currently close to 800., but we hate to to continue to pay for a hole in the ground (so to speak) What about a Deed in Lieu of Foreclosure?
Welcome,
To Junior,
You can apply for a deed in lieu. But lenders accept a deed in lieu, only if you are delinquent on your mortgage payments. A deed in lieu will lower your credit score by around 250 points.
To Guest,
Your lender would accept your deed in lieu request if you are delinquent on your mortgage payments. In case, your lender accepts your request, your credit score will be ruined by 250 points. Moreover it would remain on your credit report for 7 years. You can apply for a short sale if you can pay off the deficient amount resulting from the sale of the property. It will reduce your credit score by 75-100 points.
To Junior,
You can apply for a deed in lieu. But lenders accept a deed in lieu, only if you are delinquent on your mortgage payments. A deed in lieu will lower your credit score by around 250 points.
To Guest,
Your lender would accept your deed in lieu request if you are delinquent on your mortgage payments. In case, your lender accepts your request, your credit score will be ruined by 250 points. Moreover it would remain on your credit report for 7 years. You can apply for a short sale if you can pay off the deficient amount resulting from the sale of the property. It will reduce your credit score by 75-100 points.
I am moving to my country of origin as I cannot keep up with the payments on my condo. I just want to return the keys. How do I do that?
I have not been late on any payments (mortgage or otherwise), and I have not yet lost my job (cross my fingers). Due to the terrible rental market on a condo I own with my parents I am in the red every month despite massively cutting back on our budget.
We have tried refinancing our home to a lower rate but the foreclosures in our area have drastically reduced our value. We have tried to negotiate with our credit card companies but to no avail.
If we were to proceed with a deed in lieu what are the chances that we could immediately get into a lower priced home that fell within our newly established DTI ratio? How drastically does your credit get hit? Is there a time period in which lenders will not give you a new loan due to the deed in lieu?
We are trying to do the right thing but it is getting out of control...
We have tried refinancing our home to a lower rate but the foreclosures in our area have drastically reduced our value. We have tried to negotiate with our credit card companies but to no avail.
If we were to proceed with a deed in lieu what are the chances that we could immediately get into a lower priced home that fell within our newly established DTI ratio? How drastically does your credit get hit? Is there a time period in which lenders will not give you a new loan due to the deed in lieu?
We are trying to do the right thing but it is getting out of control...
Hi!
Welcome to forums!
To Maria,
You can contact the lender and apply for a deed in lieu. If the lender accepts your deed in lieu request, then you will have to transfer the property to the lender. However, you should note that a deed in lieu will ruin your credit score (in US) by 250 points.
To anonymous T,
If you go for a deed in lieu foreclosure, you will not be able to purchase a property immediately. You will have to wait for 3-4 years in order to get a home loan with better rates and terms. A deed in lieu foreclosure will reduce your credit score by 250 points.
Feel free to ask if you have further queries.
Sussane
Welcome to forums!
To Maria,
You can contact the lender and apply for a deed in lieu. If the lender accepts your deed in lieu request, then you will have to transfer the property to the lender. However, you should note that a deed in lieu will ruin your credit score (in US) by 250 points.
To anonymous T,
If you go for a deed in lieu foreclosure, you will not be able to purchase a property immediately. You will have to wait for 3-4 years in order to get a home loan with better rates and terms. A deed in lieu foreclosure will reduce your credit score by 250 points.
Feel free to ask if you have further queries.
Sussane
After trying for the longest (6months) to negotiate a loan mod. (submitted hardship letter and budget list) with lender, I was rejected. I was/am 6 months delinquent due to a financial crisis. Now, I received via cert. mail a notice to vacate IMMEDIATELY ! At this particular time, a family member (one of two major contributors for mortgage payment of house) was hospitalized for 10days and is at home recuperating with no date of return to work. Is it possible for us to have an extension to stay in house until family member recuperates and then vacate ? According to the letter received, our failure to do so will result in the immediate filing of an action in forcibly entry and detainer. Who should I contact ? Please help me ! Thank You.
Hi Guest,
You should contact your lender immediately and negotiate with him so that he can give you some time to stay in the property. This will help your family member to recuperate. Then you may vacate the property.
I guess, the lender has started pre-foreclosure procedure. You can contact the lender and apply for a short sale or a deed in lieu of foreclosure.
Thanks
You should contact your lender immediately and negotiate with him so that he can give you some time to stay in the property. This will help your family member to recuperate. Then you may vacate the property.
I guess, the lender has started pre-foreclosure procedure. You can contact the lender and apply for a short sale or a deed in lieu of foreclosure.
Thanks
hi
my husband and I are just barely staying afloat on our primary property and we also own a piece of rental property. recently the tenant has stopped paying the rent and we do not have enough disposible income left to cover the mortgage on that house while we try to evict the tenant and find another one.
when my husband contacted the mortgage company for that house and explained the situation, they suggested a deed in lieu of foreclosure. i just started doing some research on the subject because we cannot afford to consult with a real estate attorney or a tax advisor. we are trying to figure out what the ramifications of all of this will be.
can you offer any advice or point us in the right direction? i'm very nervous about all of this and concerned about how it will affect us for our primary property. thanks.
my husband and I are just barely staying afloat on our primary property and we also own a piece of rental property. recently the tenant has stopped paying the rent and we do not have enough disposible income left to cover the mortgage on that house while we try to evict the tenant and find another one.
when my husband contacted the mortgage company for that house and explained the situation, they suggested a deed in lieu of foreclosure. i just started doing some research on the subject because we cannot afford to consult with a real estate attorney or a tax advisor. we are trying to figure out what the ramifications of all of this will be.
can you offer any advice or point us in the right direction? i'm very nervous about all of this and concerned about how it will affect us for our primary property. thanks.
Hi Guest,
If you go for a deed in lieu, the property in question will be sold off and the deficient amount resulting from the sale of the property will be forgiven. This will have a negative effect on your credit score and will lower it by 250 points. Apart from this, it will remain your credit report for 7 years. As the deficient amount will be forgiven by the lender, your primary residence will not be effected.
You can speak to your lender about a loan modification if you want to save the rental property.
Thanks
If you go for a deed in lieu, the property in question will be sold off and the deficient amount resulting from the sale of the property will be forgiven. This will have a negative effect on your credit score and will lower it by 250 points. Apart from this, it will remain your credit report for 7 years. As the deficient amount will be forgiven by the lender, your primary residence will not be effected.
You can speak to your lender about a loan modification if you want to save the rental property.
Thanks