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?
Welcome,
To Zee,
You can negotiate with your lender yourself. You can write a hardship letter to the lender and check out if he agrees for a deed in lieu. However, if you are not comfortable in negotiating with your lender, then you can contact an attorney so that he can negotiate with your lender.
To Cher,
If you walk away from the property, then the lender would foreclose it and sue you for the deficient amount. You can write a certified letter to the lender requesting for a deed in lieu of foreclosure. I don't think lodging a complaint against the lender would be of any help.
To Zee,
You can negotiate with your lender yourself. You can write a hardship letter to the lender and check out if he agrees for a deed in lieu. However, if you are not comfortable in negotiating with your lender, then you can contact an attorney so that he can negotiate with your lender.
To Cher,
If you walk away from the property, then the lender would foreclose it and sue you for the deficient amount. You can write a certified letter to the lender requesting for a deed in lieu of foreclosure. I don't think lodging a complaint against the lender would be of any help.
I have a second home that I tried to sell just before the market fell out so I was unable to sell. I rented it out at a big loss thinking I could wait out the housing market but in the past 2 years the house lost so much value I am now upside down on it. I applied for a mod with my lender but they denied it.
I can' t continue making the payments even though I'm current on the mortgage because my business has declined in the past 2 years. I don't have and second liens on the home.
Would it be better for me to try to short sell this house which is currently rented or convey in a deed in lieu?? Should I contact my bank about that or a lawyer?
I can' t continue making the payments even though I'm current on the mortgage because my business has declined in the past 2 years. I don't have and second liens on the home.
Would it be better for me to try to short sell this house which is currently rented or convey in a deed in lieu?? Should I contact my bank about that or a lawyer?
you'll want to deal with your lender. if you need an advocate to assist you, you can certainly deal with an attorney, but you will also do well to check the hud.gov website and search for a counseling service (urban league, for example) in your area that can be of assistance.
what are the renters rights as a tenant in a property where the landlord is using the steps in lieu of foreclosure?
Hey bc,
If your landlord is planning for a deed in lieu of foreclosure, he should inform you about it so that you, the renter, get time to move out of the property and look out for a new place to live in. As a renter, you may even negotiate with the lender and check if he would allow you to rent that property.
If your landlord is planning for a deed in lieu of foreclosure, he should inform you about it so that you, the renter, get time to move out of the property and look out for a new place to live in. As a renter, you may even negotiate with the lender and check if he would allow you to rent that property.
I paid my loan on time when I could. I have not been able to work for four years. My income has dropped, I receive disability and I have missed over 6 mortgage payments. My mortgage company has filed a N.O.D. to sale in a month. Can I request a deed in lieu of foreclosure?
you sure can, anon...you are best served to respond to the notice of foreclosure right away - have discussions with your lender if you haven't already. i'm hoping you've been in contact, and that you're not too late.
Guest
Try this link. You will fidn more details
http://www.mortgagefit.com/deed-lieu.html
Good luck and feel free to ask
Try this link. You will fidn more details
http://www.mortgagefit.com/deed-lieu.html
Good luck and feel free to ask
Why would the lender take a deed in lieu rather than forclose? How does one go about initiating this process?
Hi,
It is totally the discretion of the lender whether or not he would accept your deed in lieu of foreclosure. As far as initiating the process is concerned, you need to contact the lender and submit a hardship letter. The hardship letter should inform the lender about your financial crisis. The lender will judge your situation depending upon your letter and then would decide whether or not he would accept your request.
Take care.
It is totally the discretion of the lender whether or not he would accept your deed in lieu of foreclosure. As far as initiating the process is concerned, you need to contact the lender and submit a hardship letter. The hardship letter should inform the lender about your financial crisis. The lender will judge your situation depending upon your letter and then would decide whether or not he would accept your request.
Take care.
We own a property that is not selling and we can no longer afford the mtg. (We had a business within the property which has gone out of business and we can't seem to lease the property out either)
If we give to bank deed in lieu will we be responsible for balance due if they sell at a loss? VS..if we are foreclosed on, will we be responsible for the loss if they can't sell for mtg. owed?
We can't take the chance that we may still owe a large amount of $$ on the property.
If we give to bank deed in lieu will we be responsible for balance due if they sell at a loss? VS..if we are foreclosed on, will we be responsible for the loss if they can't sell for mtg. owed?
We can't take the chance that we may still owe a large amount of $$ on the property.
Hi janjobo,
In case of a deed in lieu, the lender forgives the deficient amount resulting from the sale. However, if the property is foreclosed upon by the lender, then he can sue you for the deficient amount. If you cannot pay off the deficient amount, the lender can place a lien on your other properties. If you want to avoid paying the deficient amount, then it's better to go for deed in lieu of foreclosure. You will not have to pay the taxes on the forgiven amount as per the Mortgage Debt Relief Act.
Take care.
In case of a deed in lieu, the lender forgives the deficient amount resulting from the sale. However, if the property is foreclosed upon by the lender, then he can sue you for the deficient amount. If you cannot pay off the deficient amount, the lender can place a lien on your other properties. If you want to avoid paying the deficient amount, then it's better to go for deed in lieu of foreclosure. You will not have to pay the taxes on the forgiven amount as per the Mortgage Debt Relief Act.
Take care.
We just short-saled our rental (mistake adj loan, upside down), and are working with a debt settlement company on 70K revolving. After that, we will still be "insolvent" with 200K negative on primary home, 20K in taxes, 40K in other loans, and 150K inupcoming student loans. Should we short sale the residence, save 2K/mth by renting for three years, and pay down as much debt as possible? I still make good income, but we can show house payment ratio higher than 33% and no net worth. Thanks
Check with yoru bank for loan modification
Hi jimsan!
Welcome to forums!
If you want to get rid of your principle residence, then you should first try for a deed in lieu of foreclosure. As it's your principle property, you will not be responsible for the deficient amount resulting from the sale of the property. On the other hand, if you go for a short sale, then you would be liable for paying the deficient amount.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If you want to get rid of your principle residence, then you should first try for a deed in lieu of foreclosure. As it's your principle property, you will not be responsible for the deficient amount resulting from the sale of the property. On the other hand, if you go for a short sale, then you would be liable for paying the deficient amount.
Feel free to ask if you've further queries.
Sussane