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?
merrick,
as there is good enough equity in the house why are you attempting a dil? you tried refinancing both into a single one? the house value is at $370k, a lot more than what you owe on both the mortgages combined.
if there is any particular reason because of which you are not attempting to refinance the mortgages and instead looking for a deed in lieu then share it with us.
we can provide you some suggestions on how to deal with the situation if you give us more details.
as there is good enough equity in the house why are you attempting a dil? you tried refinancing both into a single one? the house value is at $370k, a lot more than what you owe on both the mortgages combined.
if there is any particular reason because of which you are not attempting to refinance the mortgages and instead looking for a deed in lieu then share it with us.
we can provide you some suggestions on how to deal with the situation if you give us more details.
I'm afraid the property will become negative if I refinance higher. Debt ratio is horrible as well...77% on paper. The house will not sell at $295k and has been vacant for 1 yr. Taxes are coming due on both houses...$11k total....somethings got to give? At this point, I'm not interested in the equity, I just want out with the least damage to my credit. Any suggestions?
"I'm afraid the property will become negative if I refinance higher. "
What do you mean by property will become negative? and how?
If appraised value of the house is $370k then lender will do the loan on its basis not on what houses are selling for presently.
"I just want out with the least damage to my credit."
If you go for a dil, your credit will get affected. So you need to explore all the options before selecting to give up the house through a deed in lieu.
Miller
What do you mean by property will become negative? and how?
If appraised value of the house is $370k then lender will do the loan on its basis not on what houses are selling for presently.
"I just want out with the least damage to my credit."
If you go for a dil, your credit will get affected. So you need to explore all the options before selecting to give up the house through a deed in lieu.
Miller
Hi Merrick,
If the debt to income ratio is higher, why not go for a no-ratio loan. Such loans do not require borrowers to provide information on debt to income ratio and housing ratio. Instead what is required is you should have a good credit score. Just refer to http://www.mortgagefit.com/know-how/about5903.html#no-ratioloan to know more on No-ratio loans.
If the debt to income ratio is higher, why not go for a no-ratio loan. Such loans do not require borrowers to provide information on debt to income ratio and housing ratio. Instead what is required is you should have a good credit score. Just refer to http://www.mortgagefit.com/know-how/about5903.html#no-ratioloan to know more on No-ratio loans.
hi ,
me and my wife ( now ex wife ) bought our dream home in aug 2006 , we ended up splitting only 3 weeks after moving into the new home.. i was left with the house and a payment which was over my head.. i now work two full time jobs to barley pay the payment on time, i have been struggling for the whole year.. , i decided to put my house up for sale 2 weeks ago.. even thougjh no one is buying houses .. , i decided maybe i should try to refinance and get me payments lower, then maybe i could afford to stay here .. but now everyone is telling me they cant refinace because i just put my house on the market and i would have to wait 6 months !! 6 months ! ? by then i can be in forecloser ... any ideas anyone? i know the short sale idea.. but again, no one has even looked at my house. im getting realy tired of working 14-16 hrs a day 6 days a week to pay for a house i never see.. any help advice ? i have fantastic credit as of right now.. 800 .. but that wont last long.. as soon as i start being late on my payments ..
me and my wife ( now ex wife ) bought our dream home in aug 2006 , we ended up splitting only 3 weeks after moving into the new home.. i was left with the house and a payment which was over my head.. i now work two full time jobs to barley pay the payment on time, i have been struggling for the whole year.. , i decided to put my house up for sale 2 weeks ago.. even thougjh no one is buying houses .. , i decided maybe i should try to refinance and get me payments lower, then maybe i could afford to stay here .. but now everyone is telling me they cant refinace because i just put my house on the market and i would have to wait 6 months !! 6 months ! ? by then i can be in forecloser ... any ideas anyone? i know the short sale idea.. but again, no one has even looked at my house. im getting realy tired of working 14-16 hrs a day 6 days a week to pay for a house i never see.. any help advice ? i have fantastic credit as of right now.. 800 .. but that wont last long.. as soon as i start being late on my payments ..
If I do foreclose on my home.. I know I will get hoit with a 1099 for the earned income ( forgiveness of debt ) and also with a short sale.. Does this also happen with a Deed in lieu ?
Thanks for your time !
Thanks for your time !
Hi Chuck,
You are in a difficult position and doing two jobs can be really difficult.
But if you want save your excellent credit score, you should continue both jobs for some more time. I know it would be difficult but there is no better option right now.
Take the home off the market first and then after couple of months contact lenders about a refinance. I am sure they will agree then to consider refinancing your loan.
Foreclosure, deed in lieu and short sale, all will spoil your credit score. So it would be better if these can be avoided.
Miller
You are in a difficult position and doing two jobs can be really difficult.
But if you want save your excellent credit score, you should continue both jobs for some more time. I know it would be difficult but there is no better option right now.
Take the home off the market first and then after couple of months contact lenders about a refinance. I am sure they will agree then to consider refinancing your loan.
Foreclosure, deed in lieu and short sale, all will spoil your credit score. So it would be better if these can be avoided.
Miller
Thanks for the advice ! I appreciate it !
If I leave the house on the market for 90 days and ask my lenders for a Deed in lieu , do I still get the 1099 for debt forgiveness?
- Chuck
If I leave the house on the market for 90 days and ask my lenders for a Deed in lieu , do I still get the 1099 for debt forgiveness?
- Chuck
Hi Chuck,
You will have to first take the house back from market before which lender would listen to anything.
And even after accepting a dil, lender would send a 1099 for debt forgiven.
You will have to first take the house back from market before which lender would listen to anything.
And even after accepting a dil, lender would send a 1099 for debt forgiven.
What happens if your house is worth less than what you owe and you do a deed in lieu?
Thank You
Thank You
Hi Jeri,
After giving away the property through a deed-in-lieu, the lender cannot come after you for anything else. It means that you will not owe the lender any more money even if the sale through deed-in-lieu does not cover what you owed on your mortgage.
After giving away the property through a deed-in-lieu, the lender cannot come after you for anything else. It means that you will not owe the lender any more money even if the sale through deed-in-lieu does not cover what you owed on your mortgage.
Deed in lieu sounds great. I have a friend that's behind in his mortgage payments and he is thinking about doing a short sale. Can you tell me which is better a short sale or a deed in lieu?
Hi Jeri,
You will still owe money even if the home sale through deed-in-lieu does not give the lender a price enough to cover your outstanding balance. Ideally you should pay off the remaining loan balance but even if you don't, the lender cannot seek a deficiency judgement. He may at best declare the debt as forgiven and as such you may have to pay the IRS a certain amount of tax.
Take Care
You will still owe money even if the home sale through deed-in-lieu does not give the lender a price enough to cover your outstanding balance. Ideally you should pay off the remaining loan balance but even if you don't, the lender cannot seek a deficiency judgement. He may at best declare the debt as forgiven and as such you may have to pay the IRS a certain amount of tax.
Take Care
Hi,
A short sale and a deed-in-lieu - both have a negative impact on the credit report of a borrower. So, even if your friend does a deed-in-lieu or a short sale, it will hamper his credit report.
However, with a short sale, the loan shows up as 'paid' or 'settled for less than originally owed' in the credit report, which I think is better then a deed-in-lieu of foreclosure.
A short sale and a deed-in-lieu - both have a negative impact on the credit report of a borrower. So, even if your friend does a deed-in-lieu or a short sale, it will hamper his credit report.
However, with a short sale, the loan shows up as 'paid' or 'settled for less than originally owed' in the credit report, which I think is better then a deed-in-lieu of foreclosure.
My wife's medical condition ( onset of seizures ) has made it so that we must move out of our home ASAP and get her from California, where we own our home...back to Georgia, where she will be much closer to close family members and friends that can help us out. ( we have 5 children as well, ages 13 down to 6 months old )... We currently owe about 565k on the home here in California, but the most we could expect to "net" on the sale of the home would be about 500k max. I am missing a lot of work now to care for my wife and kids and will soon be unable to make my mortgage payments....We owe 415k on the First Mortgage and 150k on a HELOC....What is going to be the best way to approach the banks ( it is Chase for the 1st Mortgage and Chase Home Equity for the HELOC ) and notify them of our situation and do the least damage to my wife's credit. ( Both of the loans are in her name only, due to her, at the time, having a much better credit score than I did ) I am on the title of the home along with her. Your direction is appreciated more than you know. God Bless you for this website. It has been an answer to my prayers just to be able to ask someone what to do. We have to be out of our California home completely by December 20th and will be in Georgia no later on December 30th ( as we have a flight connecting through there coming back from our Christmas Vacation to New York ) Our plans are to use the return "leg" of that trip to physically get all 7 of us to Georgia. We are having our personal items and 2 vehicles shipped from California to Georgia while we are in NY from Dec. 20-30th. I am praying that whatever solution is provided to us, will include our ability to be rent a home in Georgia while we "weather this storm". Thanks again...