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?
Can you get a Deed in Lieu on an investment property?
Hi anonymous,
You can get a deed in lieu on an investment property. You can apply for a deed in lieu if you've defaulted the mortgage payments. It's the discretion of the lender whether or not he would accept your request.
Thanks
You can get a deed in lieu on an investment property. You can apply for a deed in lieu if you've defaulted the mortgage payments. It's the discretion of the lender whether or not he would accept your request.
Thanks
my wife and I we are in proces to buy a bigger house -2240sqft-we also own a town home (smaller-1563 sqft - and we try to rent this one). What hapend if we are not able to pay 2 mortgages?Can you offer any advice?How it will affect us for our primary property(2240 sqft).We live in Las Vegas. Any tax problems?
can the bank come after my primary residence ? thanks.Adrian
can the bank come after my primary residence ? thanks.Adrian
Is deed in lieu of foreclosure better than deed in reduction
Hi,
To steliosbogdan,
Your query has been answered in the given link:
http://www.mortgagefit.com/inprocess/about24209.html#105967
Please take a look at it. I hope it helps you.
To Guest,
Deed in reduction is a company specific program and not all lenders would be ready to offer this plan. However, deed in lieu foreclosure is offered by all the lenders. So in my opinion, it would be better to go for a deed in lieu, though it lowers your credit score by 250 points.
Thanks
To steliosbogdan,
Your query has been answered in the given link:
http://www.mortgagefit.com/inprocess/about24209.html#105967
Please take a look at it. I hope it helps you.
To Guest,
Deed in reduction is a company specific program and not all lenders would be ready to offer this plan. However, deed in lieu foreclosure is offered by all the lenders. So in my opinion, it would be better to go for a deed in lieu, though it lowers your credit score by 250 points.
Thanks
As a private party lien holder how do I file against the credit report of the persons who I have the deed in lieu against?
Thanks
Wanda
Thanks
Wanda
I have a home in NY and am working in NJ. We just purchased a home in NJ due to the commuting and expense of traveling back and forth. We had someone that agreed to rent our home in NY since it has been in the market for almost a year and no one has even called to see it. We are set to close on the new home in August 09 but this person has backed out of renting our current home. There is no way we can afford to keep both homes. Can anyone help? We have owned the NY home for 5 yrs with no problems. Should we foreclose or "Deed in Lieu" or walkaway from the NJ home? If we walk away from the NY home will the bank garnish our wages or come after our new home? Any advice would be greatly appreciated.
13...i don't think anyone responded to you - can't tell you any difference because i don't have familiarity with "deed in reduction."
wanda...you won't be able to report to credit agencies unless you are affiliated with them; as a private individual, that's not within their realm.
carlos...you can, of course, seek another tenant; you could do a deed in lieu if the lender agrees. can they seek a deficiency - i don't have that expertise, but you can check with a real estate attorney who can advise further. can they attach your wages? no, unless something really, really wacky happens in our credit-based economy. can you walk away from the new jersey purchase - sure, why not? you'd lose your deposit, i'm sure, though. and walking away from new york would benefit nobody, so i think that'd be a bad move all around.
wanda...you won't be able to report to credit agencies unless you are affiliated with them; as a private individual, that's not within their realm.
carlos...you can, of course, seek another tenant; you could do a deed in lieu if the lender agrees. can they seek a deficiency - i don't have that expertise, but you can check with a real estate attorney who can advise further. can they attach your wages? no, unless something really, really wacky happens in our credit-based economy. can you walk away from the new jersey purchase - sure, why not? you'd lose your deposit, i'm sure, though. and walking away from new york would benefit nobody, so i think that'd be a bad move all around.
I have been on a medical long term disability and the money is getting tighter and tighter. I have some savings left and would like to be able to get out from underneathe this house with some cash left to move on. If I ask for the deed in lieu will the bank (lender) take any cash I have to help relieve their burden?
Hi Chester!
Welcome to forums!
The lender will not sue you for the deficient amount in a deed in lieu. Lenders normally forgive this deficient amount. The forgiven amount can be considered as your income by the IRS and you can be taxed on that amount. However, depending upon the laws of your state, the taxes on the balance amount can be forgiven.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
The lender will not sue you for the deficient amount in a deed in lieu. Lenders normally forgive this deficient amount. The forgiven amount can be considered as your income by the IRS and you can be taxed on that amount. However, depending upon the laws of your state, the taxes on the balance amount can be forgiven.
Feel free to ask if you've further queries.
Sussane
When is it too late to request a deed in lieu? We have only 5 weeks until a hearing, and 8 weeks until a sale date of forclosure. Does the lender have the right to decline the request?
I bought my house 2007 and i lsot my job 2009 you think i can use deed in lieu to avoid forclosure??isit possible
Hi,
To Leanza,
You can request for a deed in lieu now but it would be the discretion of the lender whether or not he would accept your request. The lender has the right to decline your request. It would have been better if you could have applied for a deed in lieu before you received the foreclosure notice.
To lottry,
You can definitely apply for a deed in lieu if you are delinquent on your mortgage payments. It is one of the ways to avoid foreclosure. The lender will sell off the property and you won't be responsible for the delinquent amount resulting from the sale of the property. However, it would lower your credit score by 200-250 points.
Thanks
To Leanza,
You can request for a deed in lieu now but it would be the discretion of the lender whether or not he would accept your request. The lender has the right to decline your request. It would have been better if you could have applied for a deed in lieu before you received the foreclosure notice.
To lottry,
You can definitely apply for a deed in lieu if you are delinquent on your mortgage payments. It is one of the ways to avoid foreclosure. The lender will sell off the property and you won't be responsible for the delinquent amount resulting from the sale of the property. However, it would lower your credit score by 200-250 points.
Thanks
Since the Jr. Loan creates a problem with optaining a Deed in Lieu.
I have heard that the jr. Loan can possibly be negotiated for a %, maybe 10%. to settle the Jr. Loan. Which can free one up to request a deed in Lieu from the first Loan.
How does one go about requesting the settlement with the Jr. Loan, and or should one have a Lawyer to negociate this transaction? I am unemployed now, still current on all, but it's getting pretty close. Plus is it costly to have a lawyer negociate the settlement of the Jr. and request the Deed in Lieu?
I have heard that the jr. Loan can possibly be negotiated for a %, maybe 10%. to settle the Jr. Loan. Which can free one up to request a deed in Lieu from the first Loan.
How does one go about requesting the settlement with the Jr. Loan, and or should one have a Lawyer to negociate this transaction? I am unemployed now, still current on all, but it's getting pretty close. Plus is it costly to have a lawyer negociate the settlement of the Jr. and request the Deed in Lieu?
My husband and I are considering a deed in lieu however, we cannot get
the mortgage holder to return our telephone calls so we can start the process. We cannot afford the house payments and we are considering just moving out of the house and letting the bank do what they must. Do you have any advice or who can we contact to lodge a complaint about the lender?
the mortgage holder to return our telephone calls so we can start the process. We cannot afford the house payments and we are considering just moving out of the house and letting the bank do what they must. Do you have any advice or who can we contact to lodge a complaint about the lender?