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?
The lender won't come after you for the deficient amount once the deed in lieu of foreclosure takes place. The deficient amount will be forgiven by him. However, you won't be liable for paying the taxes on that forgiven amount due to the Mortgage Debt Relief Act.
I'm 60 my wife is 52, we bought our house in 2003. We refiananced and took some equity two years ago to upgrade the house. We have both lost jobs but now both have jobs. Our income has fallen approx 12K per year and find that we cannot afford to make our house payment. The mortgage balance is 160K, per comps we found on the internet our house is worth 125 K now. We have negative equity. Should we ask Wells Fargo for a deed in lieu deal? There is way more to this story involving Wells Fargo's loan modification which was closed in Nov. It took 8 months for them to do the loan mod. When the mod was closed our payment went up $50 a month after I payed a $1250.00 fee to close. I actually haven't paid a house payment since Feb. 2009.
I have been struggling with chase bank for the last four years. I finaly gave up. after being denied a modification and other help I decided to move my family out of our home and into a small rental. I am happy now and I guess I am waiting to get the notice. I recieved a leter about deed in lieu of foreclosure and i figure it woud be much better. I recieved the tax assessment and it is at 198k and I owe 202k and the market is at about 170k. I want out from under the house of card that i have now. Am I right that a DILF is the best and quickest option? and they can;t try to collect the differance between the sale price and the loan amount? I know they can here in washington state if the property is foreclosed on. Clarification would be great. Thanks
Can i still claim my house even when i am behnd on payments
Hi George,
In my opinion, it would be a good option to apply for a deed in lieu of foreclosure. However, it would be your lender's discretion whether or not he would accept it.
Hi Jacob,
A deed in lieu of foreclosure will be the best and quickest option in your case. It is true that the lender will not be able to collect the deficient amount from you after the sale is over.
Hi Guest,
The house will not be considered as a personal exemption. However, if you are paying the mortgage and property taxes, then you will be allowed to itemize rather than use the standard deduction.
Thanks
In my opinion, it would be a good option to apply for a deed in lieu of foreclosure. However, it would be your lender's discretion whether or not he would accept it.
Hi Jacob,
A deed in lieu of foreclosure will be the best and quickest option in your case. It is true that the lender will not be able to collect the deficient amount from you after the sale is over.
Hi Guest,
The house will not be considered as a personal exemption. However, if you are paying the mortgage and property taxes, then you will be allowed to itemize rather than use the standard deduction.
Thanks
when you sign a deed in liue of foreclosure, do they give you a start-up fee for your future location?
I have never heard of a starting fee given by your lender for the borrower's future location. Thus, I don't think there is any such fee.
I live in florida where nothing is moving in realestate. MY company is moving me to atlanta ga. my house is worth more than what I owe. I am unable to make the house payment and rent payment with just one income is deed in lieu a viably option?
Your query has been answered in the given page:
http://www.mortgagefit.com/georgia/dil-owemoney.html
Take a look at it. I hope it will help you.
http://www.mortgagefit.com/georgia/dil-owemoney.html
Take a look at it. I hope it will help you.
how to avoid to pay difference if house was sold for less than we owe
After you sell off your property through a deed in lieu of foreclosure, your lender will not be able to come after you for the deficient amount. That amount is forgiven by the lender.
I currently have a monthly morgage of $1200 at a fixed 5.5%. In Jan. of 2009 my wife lost her job and wasn' teligible for unemployment. I have kept up with of our payments except for one. My wife started working again in Sept. but now I have lost my job of 25 years. What to do?
We live in our dream home which is now in a "cancer cluster" per the FL Surgeon General. Our credit is not as important as the health of our children
(which this cancer is impacting). We just want "out" as quick as we can. We are hoping to find a home with owner financing or will rent if we have to. We are current on our mortgage and have good credit. Probably an unusual question, but what is the fasted way to do that with the least impact on our credit long term?
(which this cancer is impacting). We just want "out" as quick as we can. We are hoping to find a home with owner financing or will rent if we have to. We are current on our mortgage and have good credit. Probably an unusual question, but what is the fasted way to do that with the least impact on our credit long term?
If you want to sell your property, then you need to list it in the market. This will help you in getting buyers for your property. After the sale, if you are able to pay off the loan in full, then your credit won't get affected. If case it's short sold, then your credit score can get lowered by 80-100 points. However, renting the property will not affect your score.
I see that this option is better than foreclosure, because you're not behind on payments, etc. However, what is the bottom line for my credit if I choose to give the house back to the bank in a deed in lieu of foreclosure, while I'm still managing to be current, trying to sell at 0 equity and running out of unemployment to pay them, which is why I have to get rid of it?
What will it do to my credit in terms of applying for loans, what my total score will look like before/after, and buying a house in the future?
Thanks!
What will it do to my credit in terms of applying for loans, what my total score will look like before/after, and buying a house in the future?
Thanks!