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?
Is that is viable option when your are dealing with 2 mortgage companies?
Hi Derith,
Deed in lieu of foreclosure can be an option when you have two loans. However, both the lenders will have to agree for the deed in lieu. Moreover, if the first lender goes for the deed in lieu, you would still be liable to pay off the mortgage dues of the second lender.
Take care.
Deed in lieu of foreclosure can be an option when you have two loans. However, both the lenders will have to agree for the deed in lieu. Moreover, if the first lender goes for the deed in lieu, you would still be liable to pay off the mortgage dues of the second lender.
Take care.
we have a fha insured loan, due to both of us now unemployed we have discussed loan mods. with lender, they are saying they are not approved for the fha making home affordable program and suggested deed in lieu instead. we don't care about giving up home just wondering about credit issues and can they require us to pay the loss on sale of the home?
Hi Mikeyjb,
A deed in lieu of foreclosure would reduce your credit score by 250 points and will remain on your credit report for 7 years. Apart from this, you won't be able to apply for a mortgage within the next 3-4 years. However, you won't be responsible for paying off the deficient amount resulting from the sale of your property.
Thanks
A deed in lieu of foreclosure would reduce your credit score by 250 points and will remain on your credit report for 7 years. Apart from this, you won't be able to apply for a mortgage within the next 3-4 years. However, you won't be responsible for paying off the deficient amount resulting from the sale of your property.
Thanks
Hi,
We bought our home 5 years ago. My husband is being laid off in December. We pay well over 50% for our mortgage & taxes. We cannot refinance & to have a short sale would be impossible considering our home needs work. We are about to have our 5th child in March. We really cannot afford to pay our mortgage & taxes. We have not missed a payment yet but that is b/c my husband is still receiving income. I stay home with the children. My question is will a DIL or foreclosure be better for us? We have 2 mortgages. We live in NY. Will we be responsible for back taxes as well? What do we need to do?? Please advise.
Thank you very much.
We bought our home 5 years ago. My husband is being laid off in December. We pay well over 50% for our mortgage & taxes. We cannot refinance & to have a short sale would be impossible considering our home needs work. We are about to have our 5th child in March. We really cannot afford to pay our mortgage & taxes. We have not missed a payment yet but that is b/c my husband is still receiving income. I stay home with the children. My question is will a DIL or foreclosure be better for us? We have 2 mortgages. We live in NY. Will we be responsible for back taxes as well? What do we need to do?? Please advise.
Thank you very much.
hi georgette,
a deed in lieu of foreclosure can be a good option in your case. you will be able to get rid of the property and won't be liable for the deficient amount, in case of first mortgage, resulting from the sale of the property. as far as second mortgage is concerned, you'll have to clear off the dues or else, the lender may send it to collections. you should note that a deed in lieu will lower your credit score by 250 points.
in case of a foreclosure, the credit effects would be same. however, you would be responsible for paying the deficient amount for the first as well as the second mortgage.
in any case, you will have to pay off the back taxes.
a deed in lieu of foreclosure can be a good option in your case. you will be able to get rid of the property and won't be liable for the deficient amount, in case of first mortgage, resulting from the sale of the property. as far as second mortgage is concerned, you'll have to clear off the dues or else, the lender may send it to collections. you should note that a deed in lieu will lower your credit score by 250 points.
in case of a foreclosure, the credit effects would be same. however, you would be responsible for paying the deficient amount for the first as well as the second mortgage.
in any case, you will have to pay off the back taxes.
I am th lender on vacant land...the borrower is ten months behind...
the property might not be worth what is owed ...
Should I try to do DIL.........
[E-mail address deleted as per forum rules. Thanks.]
the property might not be worth what is owed ...
Should I try to do DIL.........
[E-mail address deleted as per forum rules. Thanks.]
Hi Jim!
Welcome to forums!
As you're the lender, it is totally your discretion whether you want to go for a deed in lieu or foreclose the property. If you agree to a deed in lieu of foreclosure, you will only be able to recover the property. You won't be able to sue the borrower for the deficient amount resulting from the sale of the property.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
As you're the lender, it is totally your discretion whether you want to go for a deed in lieu or foreclose the property. If you agree to a deed in lieu of foreclosure, you will only be able to recover the property. You won't be able to sue the borrower for the deficient amount resulting from the sale of the property.
Feel free to ask if you've further queries.
Sussane
My house was in foreclosure last September 2008. I did everything that was required to stop the foreclosure. I paid the proper amount that the mortgage company told me to. They kept putting a forbearance agreement every four months. While I was compyling with the agrrement the company stated that the house is still in forclosure and they blocked my payment for November 2009. Remember, I have paid everything that I was told to pay and I paid it on time, until the payment was blocked for November 2009. I am with a debt consolitation company with my other debts because I want to restore and repair my credit. However, this mortgage company is really giving me the run around and I am really disgusted of it. Will a deed in lieu help me? How will it affect my credit?
Hi Guest,
A deed in lieu of foreclosure would help you sell off the property. However, it will affect your credit score badly. It will lower your credit score by 250 points. Also, it would remain on your credit report for the next 7 years. However, you'll not be responsible for the deficient amount resulting from the sale of the property.
Thanks
A deed in lieu of foreclosure would help you sell off the property. However, it will affect your credit score badly. It will lower your credit score by 250 points. Also, it would remain on your credit report for the next 7 years. However, you'll not be responsible for the deficient amount resulting from the sale of the property.
Thanks
Bank of America has told me that a deed in lieu of is not possible for me since I have an FHA loan. Is this true?
My 2-yr old rental property in FL is "upside down" and I was subsidizing a Section 8 tenant at a cost of $800.00 per month, hoping for recovery then. My mortgage payment is a month behind. I can no longer pay for anything and considering going to the lender for a Deed In Lieu. What should I expect and what costs will incur. Thanks.
My 2-yr old rental property in FL is "upside down" and I was subsidizing a Section 8 tenant at a cost of $800.00 per month, hoping for recovery then. My mortgage payment is a month behind. I can no longer pay for anything and considering going to the lender for a Deed In Lieu. What should I expect and what costs will incur. Thanks.
Adonis...Thanks. If I do a DIL or Short Sale of a property in FL and I live in another state, does the lender have any recourse or can the lender come after my home where I live? Thanks.