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?
Anonymous19
Deed in lieu is a foreclosure. Similiar to you giving your car back to the bank. It saves the bank time and money from having to go through the process of having to foreclose. Will still show up on your credit as a foreclosure. You would be better off trying to do a loan modification. I used Corey Lassiter at Clear Image Financial Group Inc 877-940-1477 ext 231. Maybe he can help you. If nothing more he can tell you what your options are. Who knows maybe deed in lieu just might be the best thing for you. Especially if you no longer want the house. I hope this helps!
Deed in lieu is a foreclosure. Similiar to you giving your car back to the bank. It saves the bank time and money from having to go through the process of having to foreclose. Will still show up on your credit as a foreclosure. You would be better off trying to do a loan modification. I used Corey Lassiter at Clear Image Financial Group Inc 877-940-1477 ext 231. Maybe he can help you. If nothing more he can tell you what your options are. Who knows maybe deed in lieu just might be the best thing for you. Especially if you no longer want the house. I hope this helps!
how long does a deed lieu normally takes from start to finish?
Hi, I bought a home 4 yrs ago in florida by a fraudulent private seller and rented the home out but it has been the worst experience. I have people stealing the refrigerators, the mgnst co won't help and withhold rent and i lost my job a year ago. I have savings but need to buy something for myself before i become homeless. Wells fargo isn't helping me with a loan mod, short sale or anything. I am afraid they are going to sue me if i stop making the payments but I can't take the stress anymore. Please advise.
Hi gldngrl,
As far as I know, a deed in lieu of foreclosure will require a time period of 90 days to complete after it starts off.
Hi anonymous,
If you stop making the payments, the lender has the rights to foreclose the property. After a foreclosure, the lender can sue you for the deficient amount resulting from the sale of the property. You can apply for a deed in lieu and check out if the lender is ready to help you.
As far as I know, a deed in lieu of foreclosure will require a time period of 90 days to complete after it starts off.
Hi anonymous,
If you stop making the payments, the lender has the rights to foreclose the property. After a foreclosure, the lender can sue you for the deficient amount resulting from the sale of the property. You can apply for a deed in lieu and check out if the lender is ready to help you.
I bought my house in 2007, I am now going through the modifications of the home and it is still not what I can afford. It seems that I have no other option for my home and was wondering about a Short Sale or a Deed in Lieu. I don't just want to leave my home but I'm already 6 months passed my payments. What should I do?
Hi chetell!
Welcome to forums!
If you are unable to afford your present property, it is better to go for a deed in lieu of foreclosure. Though it will lower your credit score by 250 points, you won't be responsible for paying the balance amount resulting from the sale of the property. However, your credit score would go down by 250 points.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If you are unable to afford your present property, it is better to go for a deed in lieu of foreclosure. Though it will lower your credit score by 250 points, you won't be responsible for paying the balance amount resulting from the sale of the property. However, your credit score would go down by 250 points.
Feel free to ask if you've further queries.
Sussane
I was required to sign a deed in lieu, at closing, as a condition of the sale on a wrap around mortgage. I found out that they can record that at any time because the "private" lender told me that he is recording the deed. Is that something I have recourse on, and where can I find help?
You need to speak to an attorney in this regard. He will be able to let you know whether or not you have a legal recourse to this matter.
The Mortgage relief act that was due to expire last year has been renewed for several more years.
We were told that we would have put our house on the market for at least three months before our home would be considered for the deed in lieu option. Is this correct? The market value is $28,000 less than what's owed on the mortgage.
Hi Lori,
It is absolutely correct that you will have to list the property in the market for 3 months and check out if you can sell off the property. If you are unable to sell off the property, then you can contact the lender for a deed in lieu.
It is absolutely correct that you will have to list the property in the market for 3 months and check out if you can sell off the property. If you are unable to sell off the property, then you can contact the lender for a deed in lieu.
if i have an fha insured mortgage,and go into default,will they still come after me for a deficiency,even though they get there money back from the government.
Hi,
I have a condo that my wife and I currently rent out. We are negative on the difference of the rental income and the mortage payment. The property has a negative LTV. I currently own another home that I live in. My renters decided to leave unannounced and I am unable to afford the mortage payment anymore. The bank is not willing to work with me on the loan, should I request a deed in lieu of foreclosure? Are there any other options?
I have a condo that my wife and I currently rent out. We are negative on the difference of the rental income and the mortage payment. The property has a negative LTV. I currently own another home that I live in. My renters decided to leave unannounced and I am unable to afford the mortage payment anymore. The bank is not willing to work with me on the loan, should I request a deed in lieu of foreclosure? Are there any other options?
we have been in our home for about 5 years, we are no longer able to afford the monthly payments. we requested a repayment plan. we were accepted for the repayment plan but the new monthly note is still too high.
is it too late for a deed in lieu of foreclosure?
is it too late for a deed in lieu of foreclosure?
Hi Guest,
It would be a good option to apply for a deed in lieu with your lender if you are unable to pay off the loan. If your request is accepted, then you won't be liable for the deficient balance resulting from the sale of the property.
Hi billy,
It is not late to apply for a deed in lieu. If you are unable to pay the loan, you can definitely apply for it. Depending upon your present financial situation, the lender will let you know whether or not he would accept your request.
Take care.
It would be a good option to apply for a deed in lieu with your lender if you are unable to pay off the loan. If your request is accepted, then you won't be liable for the deficient balance resulting from the sale of the property.
Hi billy,
It is not late to apply for a deed in lieu. If you are unable to pay the loan, you can definitely apply for it. Depending upon your present financial situation, the lender will let you know whether or not he would accept your request.
Take care.