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?
We couldn't make the payments on our home. It's been a little over a year since we've lived in our home or made any payments. We recently received a summons letter, our lender is suing in a judicial foreclosure proceeding and the lender is looking for a deficiency judgment. Is it too late to request for a Deed in Lieu?
My wife owned our house before we were married, and she has sinced refinanced it still in her name only. At the time, her credit was average and she got a rate of 9.5% and consolidated all of her credit cards into her mortage. Now, her credit is good but the house has greatly depreciated and I believe the lender falsely overestimated the house to give her the loan. This was roughly 2 years ago and we to buy a new home at a lower rate which we could currently qualify for. We probably have around $30,000 in negative equity and are considering a deed in lieu on our current house. My question is if we proceed with a deed in lieu, does it take an immediate hit on our credit report or would we have time to purchase the new home before the negative credit report?
Hi,
To Guest,
It is never too late to apply for a deed in lieu. You can still apply for a deed in lieu. It would have been better if you would have applied for it as soon as you became delinquent on your mortgage payments. However, you should note that it is the lender who would decide whether he would accept your request or not.
To Dave,
A deed in lieu will immediately effect your credit score. Moreover, you will have to disclose the fact that you went for a deed in lieu. If you don't, the lender has the right to penalize you and call the loan due immediately.
Thanks
To Guest,
It is never too late to apply for a deed in lieu. You can still apply for a deed in lieu. It would have been better if you would have applied for it as soon as you became delinquent on your mortgage payments. However, you should note that it is the lender who would decide whether he would accept your request or not.
To Dave,
A deed in lieu will immediately effect your credit score. Moreover, you will have to disclose the fact that you went for a deed in lieu. If you don't, the lender has the right to penalize you and call the loan due immediately.
Thanks
My wife was transferred to Florida over a year ago and the house was put up for sale. Presently, I am still living in the house. We have both a 1st and 2nd mortgage and are not delinquent in our payments. The first agent did not want to do a short sale and the second agent told us he could get the full asking price but quickly changed his tune. We have suggested to him to go for the short sale but he is also reluctant to do it. Would we have a hard time going for the Deed In Lieu and is the DIL our best choice. I might add, being separated and supporting two households is making things tight with the savings and budget.
Questions If you are current on your mortgage payments, you are under water (negative equity), what are your options that will not have a negative impact on your credit report and ability to buy a house and other loans in the future?
hi,
to gbrune,
the second lender is not accepting a short sale because he will have to satisfy the first loan. you can opt for a deed in lieu. you can request your lender for a deed in lieu and check out if he agrees to it. if he agrees to your request, then you would be able to sell off the property. however, you would still remain liable for the second mortgage. if you don't pay the second mortgage dues, the lender would either garnish your wages or place a lien on your other property.
to terry,
as you are current on your mortgage payments, the negative equity will not adversely effect your credit report. thus, in future, you will still have the ability to buy a house or go for other loans.
thanks
to gbrune,
the second lender is not accepting a short sale because he will have to satisfy the first loan. you can opt for a deed in lieu. you can request your lender for a deed in lieu and check out if he agrees to it. if he agrees to your request, then you would be able to sell off the property. however, you would still remain liable for the second mortgage. if you don't pay the second mortgage dues, the lender would either garnish your wages or place a lien on your other property.
to terry,
as you are current on your mortgage payments, the negative equity will not adversely effect your credit report. thus, in future, you will still have the ability to buy a house or go for other loans.
thanks
terry1333
Welcoem to the forum
Only way you can protect your self woudl be keep makign payments and sell the house when the market improves.
You can also do a short sale, but it will have some impact to your credit score 50 - 100. But if you are not looking to buy immeditely, then you can waiti for 3 years and get the report improved and buy a new house.
Good luck and feel free to ask
Welcoem to the forum
Only way you can protect your self woudl be keep makign payments and sell the house when the market improves.
You can also do a short sale, but it will have some impact to your credit score 50 - 100. But if you are not looking to buy immeditely, then you can waiti for 3 years and get the report improved and buy a new house.
Good luck and feel free to ask
does deed in lieu affect your credit and how?
we have a subdivision that we do not have the money to finish. It will take appx. 160,000 to finish. we owe the bank 1,300,000. we do not have any other debt other than this note. we are now in a rental. we have 1,200,000 of our own money in it. the 14 lots may only be worth appx 75-100,000 each at this time in the market down from 225,000 each. we have told the bank our situation. we have a personal guarantee on this. we only have 200,000 in IRA accounts and a paid off truck and car. we have asked the community bank for a deed in lieu but even if they did it sounds like they could come after us for the difference right? I don't want to waste time and money on a deed in lieu if its not really going to happen. Are we looking more at bankruptcy? I have a job, but would not be able to pay 3-400,000 back to the bank? Also what happens to money that we invested a year ago in a separate deal and have been trying to collect on, but as yet have not been successful?
we have a subdivision that we do not have the money to finish. It will take appx. 160,000 to finish. we owe the bank 1,300,000. we do not have any other debt other than this note. we are now in a rental. we have 1,200,000 of our own money in it. the 14 lots may only be worth appx 75-100,000 each at this time in the market down from 225,000 each. we have told the bank our situation. we have a personal guarantee on this. we only have 200,000 in IRA accounts and a paid off truck and car. we have asked the community bank for a deed in lieu but even if they did it sounds like they could come after us for the difference right? I don't want to waste time and money on a deed in lieu if its not really going to happen. Are we looking more at bankruptcy? I have a job, but would not be able to pay 3-400,000 back to the bank? Also what happens to money that we invested a year ago in a separate deal and have been trying to collect on, but as yet have not been successful?
I have a condo in Florida and making mortgage on time. Can not aford making payments due ot he fact that my income as decreased this the beginning of the year The money situation has been very tight very month. I can not rent out my condo. I was wondering in these circumstances what to do? If by any I do a loan modification and it does not get approve then what is my next option?
I know that I will need to get your lendern for the short sale and deed in lieu. I dont have the skills to negotiate the short sale or deed in lieu. How do I find someone in Florida who is well qualified to do it for me? Ive tried to call attorneys and real estate people and dont get anywhere. I need to find someone that has been through the process to guide me. Thanks for all your help.
Hi papisalsa!
Welcome to forums!
You can contact an attorney who will deal with your lender regarding short sale or deed in lieu. An attorney is the best person to help you in this regard.
Sussane
Welcome to forums!
You can contact an attorney who will deal with your lender regarding short sale or deed in lieu. An attorney is the best person to help you in this regard.
Sussane
If you decide to go through wiht a Deed In Lieu of Foreclosure, can the bank take all of your personal assets i.e. savings account?
Hi Jane!
Welcome to forums!
As far as I know, the lender only takes away the collateral if you go for a deed in lieu. The lender will not go after your personal assets. In case of a deed in lieu, you will not be liable to pay the deficient amount resulting from the sale of the property. So the lender will not be able to garnish your saving's account.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
As far as I know, the lender only takes away the collateral if you go for a deed in lieu. The lender will not go after your personal assets. In case of a deed in lieu, you will not be liable to pay the deficient amount resulting from the sale of the property. So the lender will not be able to garnish your saving's account.
Feel free to ask if you've further queries.
Sussane