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 have a contract for deed on a property that is in the process of a foreclosure. My name appears only to the title of the property and not on the mortgage loan. Would I have to get my own mortgage and if so will the current mortgage accept this transaction?
Hi Guest!
Welcome to forums!
As your name is not on the mortgage of the property, you won't be held liable for the mortgage dues. The foreclosure of the property will also not effect you.
If you want to buy a new property, then you'll have to apply for a new mortgage.
Feel free to ask if you have further queries.
Sussane
Welcome to forums!
As your name is not on the mortgage of the property, you won't be held liable for the mortgage dues. The foreclosure of the property will also not effect you.
If you want to buy a new property, then you'll have to apply for a new mortgage.
Feel free to ask if you have further queries.
Sussane
I am in the military and was reassigned to a new location. I have a house I have been in for approximately 2yr 4mths and I am having a hard time to either sell or rent the house. I don't qualify for mortgage assistance from the government. I am current on the house and could probably continue to make payments for 3-4 months.
What is my best option?
Do I continue on and just hope it sells or do I cut my losses and try a short sale or deed in lieu of foreclosure?
Which is better for my credit?
What is my best option?
Do I continue on and just hope it sells or do I cut my losses and try a short sale or deed in lieu of foreclosure?
Which is better for my credit?
Hi mericwitt,
As you want to save your credit, it would be a better option to go for a short sale. It will lower your credit score by 75-100 points. Whereas if the property is foreclosed upon or you go for a deed in lieu, your credit score will be ruined by 250 points.
Thanks
As you want to save your credit, it would be a better option to go for a short sale. It will lower your credit score by 75-100 points. Whereas if the property is foreclosed upon or you go for a deed in lieu, your credit score will be ruined by 250 points.
Thanks
It seems lenders are not doing Deeds in Lieu, like they were before. That was good when the market was high, but many homes are worth a lot less than what is owed in today's market.
I first found out about the deed in lieu option from a DVD a bought. It gave several options like the deed in lieu, lucky the DVD was about mortgage modifications. so It should be step by step how to modify my mortgage to make my mortgage more affordable. I didnt have the means to pay an attorney 2,200. the DVD should me how to do it. Check it out.. step-bysteploanmodificationdvd.com
Hi,
We filed for bankrupcy in 2008 in which our home was included, so I believe the mortgage owned is zero. However, it appears that we must go through the foreclosure process or the deed in lieu of foreclosure. A loan modification is not an option as the monthly payment would still be out of our budget at the present time. We are planning on moving to a different state for work. We want to just turn over the keys to the bank. Is this possible?
We filed for bankrupcy in 2008 in which our home was included, so I believe the mortgage owned is zero. However, it appears that we must go through the foreclosure process or the deed in lieu of foreclosure. A loan modification is not an option as the monthly payment would still be out of our budget at the present time. We are planning on moving to a different state for work. We want to just turn over the keys to the bank. Is this possible?
We are upside down on our house and facing divorce. Since we are in a community property state, the house will have to be dispositioned as part of the divorce. It was recommended to me to consider a deed in lieu of foreclosure to avoid bankruptcy. Is it likely that our mortgage lender will negotiate with us to get the deed in lieu of foreclosure?
hi,
to abyrose,
though you filed bankruptcy, your mortgage balance is not zero. if you had filed for chapter 13 bankruptcy, then you would have to make payments according to the new plan. if you had filed chapter 7 and reaffirmed the debts, then you become personally liable for the debts. thus, if the lender forecloses the property, then it will effect you once again. you can walkaway from the property but it would only lead to a foreclosure.
to stuart,
this will depend upon the discretion of the lender. as you belong to a community property state, the lender will want both of you to agree to a deed in lieu foreclosure. if your spouse is not ready for a deed in lieu, then i don't think the lender has much to do in this case.
thanks
to abyrose,
though you filed bankruptcy, your mortgage balance is not zero. if you had filed for chapter 13 bankruptcy, then you would have to make payments according to the new plan. if you had filed chapter 7 and reaffirmed the debts, then you become personally liable for the debts. thus, if the lender forecloses the property, then it will effect you once again. you can walkaway from the property but it would only lead to a foreclosure.
to stuart,
this will depend upon the discretion of the lender. as you belong to a community property state, the lender will want both of you to agree to a deed in lieu foreclosure. if your spouse is not ready for a deed in lieu, then i don't think the lender has much to do in this case.
thanks
i am wanting my bank to get my home. it is a mobile home. i own the land clear and free. it is not attached to loan papers in no way. my question is can the bank come after my land if the sell of the home is less than i owe? please advise thanks sincerely malcolm
Hi mr. sharpe,
If the lender forecloses the property or if you go for a short sale and you do not pay the deficient amount, then the lender can place a lien on the land in order to recover their dues.
If the lender forecloses the property or if you go for a short sale and you do not pay the deficient amount, then the lender can place a lien on the land in order to recover their dues.
My hushand and I filed chapter 13 bankruptcy in 2006 after I lost my job and we relocated for him a new job. We got behind on mortgage payments in 2007 and never caught back up. We are making payments on time now, but mortgage company is trying to foreclose and will not take anything else but to pay back a large sum in ten months. We can not afford this, what should we do?
Hi Misty,
The lender has the right to foreclose the property if you cannot provide him with the amount that you've defaulted. I would suggest you to speak to your lender and negotiate with him so that he can lower the due amount which will help you in paying it off.
Take Care.
The lender has the right to foreclose the property if you cannot provide him with the amount that you've defaulted. I would suggest you to speak to your lender and negotiate with him so that he can lower the due amount which will help you in paying it off.
Take Care.
My mortgage company refuses to accept a deed in lieu unless I pay them an additional $20,000. After the house being on the market for 4 years with short sale reduction of $90k below mortgage, they still won't do a deed in lieu. Is this common?? They are giving me no option but to foreclose
Hi TEC!
Welcome to forums!
This is not a common scenario in my opinion. Lenders cannot sue you for the deficient amount resulting from the sale of the property. You should try and negotiate with your lender so that he forgives or reduces the amount. You may even consult an attorney who may deal with your lender.
Feel free to ask if you have further queries.
Sussane
Welcome to forums!
This is not a common scenario in my opinion. Lenders cannot sue you for the deficient amount resulting from the sale of the property. You should try and negotiate with your lender so that he forgives or reduces the amount. You may even consult an attorney who may deal with your lender.
Feel free to ask if you have further queries.
Sussane