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?
Hi Dicks!
Welcome back to forums!
If you go for a deed in lieu of foreclosure, the lender won't sue you for the deficient amount. However, in case of a short sale, he can sue you for the deficient balance. Generally lenders won't be able to place a lien on your property if it's located in any other state. However, the lender can file a lawsuit in that state and take the court's permission to file a lien.
Feel free to ask if you've further queries.
Sussane
Welcome back to forums!
If you go for a deed in lieu of foreclosure, the lender won't sue you for the deficient amount. However, in case of a short sale, he can sue you for the deficient balance. Generally lenders won't be able to place a lien on your property if it's located in any other state. However, the lender can file a lawsuit in that state and take the court's permission to file a lien.
Feel free to ask if you've further queries.
Sussane
what about property tax? What does the lender pay? Does it become recalculated? does the hard money lender have a choice for deed in lieu too?
Hi yaut,
As far as I know, you will be responsible for the property taxes till the moment you are the owner of the property. Once you deed off the property to the lender, he would be responsible for paying off the dues.
Thanks
As far as I know, you will be responsible for the property taxes till the moment you are the owner of the property. Once you deed off the property to the lender, he would be responsible for paying off the dues.
Thanks
I own 5 single family rental houses. 2 of the houses are vacant and requir major work. the other 3 are rented but because of the economy the tenants are way behind on rent. I am no longer able to make the notes. If I do deed in lieu, can the bank come after me for, if the properties are no longer worth what is owed on them.
How long do you have after the process of Deed-in-lieu starts that you have to move out of your house
Hi jdeibert!
Welcome to forums!
You can move out of your property after you transfer it to your lender. After the deed in lieu sale, you'll get a 3 day notice period to leave the property. You'll have to leave the property within that time period.
Sussane
Welcome to forums!
You can move out of your property after you transfer it to your lender. After the deed in lieu sale, you'll get a 3 day notice period to leave the property. You'll have to leave the property within that time period.
Sussane
We have two houses, our paid for residence and a second which is mortgaged (bridge loan) and we are trying unsuccessfully to sell for 1.5 years. We are on SS with a small IRA. We are bleeding cash into the second house trying to sell. We are about out of money without tapping the IRA to keep the second until it sells. What can we do to get out from under the second before going further in the hole and also avoiding putting our primary paid for residence in danger.
Hi Jaime!
Welcome to forums!
You can contact your lender and apply for a deed in lieu of foreclosure. This will help you in getting rid of your second property and you won't be responsible for the balance amount resulting from the sale. However, your credit score would be lowered badly in this case. It will be lowered by 250 points. If you're not concerned about your credit score presently, then deed in lieu of foreclosure would be a good option for you.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You can contact your lender and apply for a deed in lieu of foreclosure. This will help you in getting rid of your second property and you won't be responsible for the balance amount resulting from the sale. However, your credit score would be lowered badly in this case. It will be lowered by 250 points. If you're not concerned about your credit score presently, then deed in lieu of foreclosure would be a good option for you.
Feel free to ask if you've further queries.
Sussane
I did a deed in lieu, the house sold and its over and we owe nothing. We this be considered a tax write off?
After a deed in lieu is complete, the deficient amount is forgiven and you are not liable to pay off the taxes on that amount depending upon the Mortgage Debt Relief Act.
i filed chapter 13 bankruptcy a couple of months ago and i included my house which was three months behind and now i am again almost three months behind. can the bank foreclose on my house with it being tied up in bankruptcy"?
Hi mshope!
Welcome to forums!
If you are unable to pay off the dues as per the repayment plan that you've received from your lender, then he can definitely foreclose the property. You should contact your lender immediately and check out if he can help you in any way.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If you are unable to pay off the dues as per the repayment plan that you've received from your lender, then he can definitely foreclose the property. You should contact your lender immediately and check out if he can help you in any way.
Feel free to ask if you've further queries.
Sussane
i bought a house a little over a year ago. i am the only person on the loan, but i was living with my "common law" husband who was helping me pay for the morgage. things have not worked out between us, and i am stuck with this payment. i know that within the next few months, i will not be able to make the payment by myself. i do not want to lose my home, i have 3 kids, who also enjoy their home. should i try to refinance or do a loan modification?
Hi Norma,
You haven't mentioned whether or not you're current on your mortgage payments. You will be able to refinance the loan if you are current on your mortgage payments and if you have equity in the property. If you do not satisfy these two criteria, then it's better to apply for a loan modification.
You haven't mentioned whether or not you're current on your mortgage payments. You will be able to refinance the loan if you are current on your mortgage payments and if you have equity in the property. If you do not satisfy these two criteria, then it's better to apply for a loan modification.