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Deed in lieu: Helps you stay away from foreclosure

Author: Jessica Bennet
Community Mentor
Ask Jessica
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?

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.

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.


Posted on: 10th Apr, 2004 03:58 am
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?
our bank said they would start foreclosure on 10-1. they said our options are to foreclose or do a deed in lieu. I don't know what would be better because my father is also on the home as a guarrentor. I want to protect him as much as I can. For my fathers protection is a deed in lieu better, foreclosure, or filing for bankrupcy-we already are in the process of filing.
Posted on: 23rd Sep, 2009 05:20 pm
Hi sorwin!

Welcome to forums!

As far as the credit effect is concerned, both deed in lieu and foreclosure would reduce your score by 250 points and remain on your credit report for 7 years. But if you go for a deed in lieu of foreclosure, you won't be liable for the deficient amount resulting from the sale of the property. However, in case of a foreclosure, you would be responsible to pay it off to the lender.

I don't think it's a good option to file bankruptcy just because of the property. It will leave a bad mark on your credit report and will remain on it for the next 10 years.

Feel free to ask if you've further queries.

Sussane
Posted on: 24th Sep, 2009 12:27 am
i suspect the bankruptcy filing has to do with a lot more than simply the property in question.

Dad's other property really ought not to be in jeopardy, unless a judgment is entered at some point. Subsequent to that, a lender can place a lien on other properties.
Posted on: 24th Sep, 2009 06:46 am
I have a property that I need to turn in in this manner. How do I get started?
Posted on: 28th Sep, 2009 07:37 am
Hi Vernon!

Welcome to forums!

You can apply for a deed in lieu of foreclosure by writing a hardship letter to your lender. The lender will judge your financial situation depending upon the hardship letter and then let you know whether or not he would accept it. A deed in lieu of foreclosure is mainly accepted by the lender when you've defaulted your loan and are on the verge of foreclosure.

Feel free to ask if you've further queries.

Sussane
Posted on: 28th Sep, 2009 10:43 pm
I have a house in Atl. I could not find a job there and moved to Pa. I had my house in Atl on the market for about 1 yr but no buyers. I am still in Pa so needless to say, I'm paying a mortgage and a high rent. Anyway .... my house in Atl recently was flooded. I hired a cleaning crew to clean my house but b/c I did not have flood ins and at the time I had a renter in the house, I only qualify for a small business loan to pay the cleaners (about 4k). I just lost my job last wk so I have no choice but to move back to NY and move in with my parents. I hired a realtor to sell my house in Atl but she told me the neighborhood is destroyed. Even though my house is cleaned up and presentable the neighborhood is not so basically I don't have a chance to sell my house. SO .... I put 30k down on my house, spent another 12K remodeling, 12k last yr on payments, & another 4k to clean it. My mortgage payment is 800.00/mnth. I have about 700.00/mnth in student loans and about 6k in credit debt. I will get about 2k/mnth in UC. I feel that a deed-in-lieu is my only option right now to pull myself out of this whole. Are you sure handing over my keys will not affect my credit? My credit is messed up already b/c of this house payment, I need to get caught up on my student loan payments and I feel getting rid of this house will be my only option.
Posted on: 05th Oct, 2009 09:08 pm
I think thats true

You cna go for deed in lieu ion this situation

Also check out and see if the goverment is offerting any relief for the the recent flood
Posted on: 05th Oct, 2009 09:44 pm
of course a deed in lieu of foreclosure will impact your credit; any time a loan goes unpaid, that is going to negatively affect credit. it appears someone gave you bad information; or, alternatively, you misunderstood.
Posted on: 06th Oct, 2009 07:20 am
heres a good one, i purchased two condos in arizona at the height of the bubble oops! now they are basically worthless both are rented but i am upside down 2k a month,with anti deficiancy in effect in arizona is my best option to just give up? with my income there is now way the lender will playball!
Posted on: 07th Oct, 2009 01:01 pm
You can contact your lender and apply for a deed in lieu of foreclosure. If the lender accepts your request, then you won't have to pay the deficient amount. However, it would definitely affect your credit report. Your credit score would get lowered by 250 points.
Posted on: 08th Oct, 2009 02:10 am
I have a mortgage in Illinois and Alabama. I lost my job and cannot pay both. If I do a deed in lieu for the Illnois house, how will that affect my Alabama mortgage? can I lose my house in Alabama, car or motor cycle? I have no other assets.
Posted on: 10th Oct, 2009 07:26 pm
Hi Guest,

If you sell off your property through a deed in lieu of foreclosure, then your property in Alabama will not be affected. The lender would forgive the deficient amount resulting from the deed in lieu sale. But, it would badly affect your credit report as it would lower your credit score by 250 points.

Thanks
Posted on: 11th Oct, 2009 11:20 pm
I have lived on my property in Ohio for over three years, but there are three other rental units also here, one of which has been sitting vacant since april (part of the reason for the trouble). I own with a business partner who has gone bankrupt and has not been living on the property for a few months. Regarding the conditions of tax relief, in a Deed in Lieu situation, would this property be considered a "primary residence" or a "rental property" and how would that affect the tax relief potentiality?

Thank you so much for your time!
Posted on: 15th Oct, 2009 12:22 am
Hi aaronj,

I suppose it's your friend's property and he is presently not staying the property. Has he rented out the property? If he has rented it out, then the property would be considered as an investment property.

But as far as I know, he would be able to get the benefit of mortgage tax relief in case of an investment property even. However, it would be better if he could consult an attorney in this regard and get his opinion.

Thanks
Posted on: 16th Oct, 2009 12:20 am
I am in pre-foreclosure and have requested to do a Deed in Lieu. My account is under review and I will hear back around the 11th of Nov. While my credit is still half way decent, I have submitted for an apartment and am looking to move in Nov. Do run any risks by not living in my home while it's in the foreclosure process? I heard from a friend in a similar situation who sold their home in a short sale that they were advised to not move out until the process was completed. So now I am worried of the consequences and what they may be.
Posted on: 16th Oct, 2009 02:57 pm
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