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?
Nope
There is no impact if you move out of yoru house during the foreclosure process
Not sure why some is suggesting that
There is no impact if you move out of yoru house during the foreclosure process
Not sure why some is suggesting that
Hi, I was given a reply by "jameshogg" but he did not seem to actually read my question. I was hoping someone could answer this for me please?
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 THE PROPERTY 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 MY tax relief potentiality?
Thank you so much for your time!
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 THE PROPERTY 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 MY tax relief potentiality?
Thank you so much for your time!
Hi aaronj,
I misunderstood your question.
I hope you are staying in the property right now. In such a situation, if you go for a deed in lieu of foreclosure, then the property would be considered as your primary residence and you would receive the tax relief benefits depending upon your state laws.
Thanks
I misunderstood your question.
I hope you are staying in the property right now. In such a situation, if you go for a deed in lieu of foreclosure, then the property would be considered as your primary residence and you would receive the tax relief benefits depending upon your state laws.
Thanks
i am retireing this month because of health reasons (bad back)...my income will be cut almost in half,,,,I know I will not be able to make my monthly mortgage payment in a month or so ...I dont want to foreclose ... would dil be a better alternative for me to part with my house....i can live with my brother but he lives in the southern part of the country and I live in the midwest...
Deed in lieu of foreclosure is definitely a better option to get rid of your property. You can write a hardship letter to the lender and apply for a deed in lieu. If the lender accepts your request, then you will have to surrender the property to him. In a deed in lieu, you won't be liable for the balance amount resulting from the sale.
I own a home with a mortgage and a second mortagage home equity line. I also own a second home with a construction loan. As a result of the new construction, I have accumulated credit card debt. Niether home will sell. My first home is cross collateralized on the construction loan. I am unable to pay all my bills based upon my salary. What do you suggest? Where do I live in the meantime?
I should also mention that the first second and construction loans are all with different lenders. How is the equity line handled and how is the cross collateral issue handled?
Iv been in my house for 4 yr, Im 3 months pass due- they tell me i dont qualify for a modification- i want them to add the tax and insurance to my morg but thy said no so I would like to do a deed in lieu. how long will it take from start to end?
To Lawrence,
You're in a tough situation. You will have to apply for a deed in lieu on your first home with your first lender. However, you would be responsible for the second loan. The second lender will have the rights to sue you for the debts. As far as the construction loan is concerned, he would try to sell off the second home and try to recover the dues.
To Guest,
A deed in lieu will take around 90 days to complete. You should write a hardship letter to the lender and apply for deed in lieu.
You're in a tough situation. You will have to apply for a deed in lieu on your first home with your first lender. However, you would be responsible for the second loan. The second lender will have the rights to sue you for the debts. As far as the construction loan is concerned, he would try to sell off the second home and try to recover the dues.
To Guest,
A deed in lieu will take around 90 days to complete. You should write a hardship letter to the lender and apply for deed in lieu.
I was about to go onto foreclosure this year and filed chapter 13 to attempt to save home. Mortgage worked up Agreed Order stating I agreed to pay $385/month for 6 months in addition to my $716/mo mortgage payment that I was already having trouble with especially even more since my payment plan under 13 was $400/mo. unable to file 7 at this time due to timing of last filing. Sure foreclosure is on way, but how long do I have before I have to move??? Are there any other options for me???
hi tamb,
if you are unable to make payments under the chapter 13 bankruptcy plan, then the lender would have the rights to foreclose the property. once you transfer the property to the lender, you will have to leave it. as you are unable to pay the dues, you can check out if the lender would be ready for a deed in lieu of foreclosure.
thanks
if you are unable to make payments under the chapter 13 bankruptcy plan, then the lender would have the rights to foreclose the property. once you transfer the property to the lender, you will have to leave it. as you are unable to pay the dues, you can check out if the lender would be ready for a deed in lieu of foreclosure.
thanks
I am considering a deed in lieu because I simply do not earn enough to maintain the home and my mortgage. My house has been on the market for several months with no showings. Is it possible to opt for a deed in lieu and when my financial situation improve to purchase a more affordable home in the future?
Hi EE,
You can apply for a deed in lieu of foreclosure with your lender. The lender would look into your situation and decide whether or not he would approve it. A deed in lieu would lower your credit score by 250 points. You won't be able to purchase a property immediately. You will have to wait for 3-4 years in order to get a home loan.
You can apply for a deed in lieu of foreclosure with your lender. The lender would look into your situation and decide whether or not he would approve it. A deed in lieu would lower your credit score by 250 points. You won't be able to purchase a property immediately. You will have to wait for 3-4 years in order to get a home loan.
Hi Guest,
As the property value has depreciated, it won't be possible for you to refinance the loan. You can apply for a deed in lieu of foreclosure.This will be a better option than a foreclosure because you won't be liable for the deficient amount resulting from the property sale. However, the credit effects for both foreclosure and deed in lieu would be the same - your credit score would be lowered by 250 points.
As the property value has depreciated, it won't be possible for you to refinance the loan. You can apply for a deed in lieu of foreclosure.This will be a better option than a foreclosure because you won't be liable for the deficient amount resulting from the property sale. However, the credit effects for both foreclosure and deed in lieu would be the same - your credit score would be lowered by 250 points.