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?
I own a property but it has a private mortgage. If a re-mortgage I have to come to closing with $30,000 due to the low appraisal value it was placed on the property due to market conditions here in South Fl.
If I give the property back with a Deed in Lieu to a private mortgage held by a couple, what are my tax consequences and how does this affect my credit? My mortgage balloned this month and I don't see light at the end of the tunnel. Please help.
If I give the property back with a Deed in Lieu to a private mortgage held by a couple, what are my tax consequences and how does this affect my credit? My mortgage balloned this month and I don't see light at the end of the tunnel. Please help.
Hi Vicky!
Welcome to forums!
If your lender accepts the deed in lieu of foreclosure, then they have the rights to report it to the credit bureau. This will affect your credit score badly and it will be lowered by 250 points. This will remain as a negative mark on your credit report for the next 7 years. However, the lender won't be able to come after you for the deficient balance.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If your lender accepts the deed in lieu of foreclosure, then they have the rights to report it to the credit bureau. This will affect your credit score badly and it will be lowered by 250 points. This will remain as a negative mark on your credit report for the next 7 years. However, the lender won't be able to come after you for the deficient balance.
Feel free to ask if you've further queries.
Sussane
I did a deed in lieu in December and I have been out of my property since Jan 1, and the mortgage co told me I was free and clear and would not owe them any money- now a second party collection agency just sent me a letter saying I owe the mortgage co $26,000 and should send them payment immediately- please tell me this is a scam and I am not liable for any back payment. I just want the nightmare to finally end- thank you for all of your help!
if I reside in MICH and purchased a home in FLA....things did not work out and I cannot make payments....I have to move back to MICh....I want to do a deed in lieu....but if I have to pay the difference from what is owed and what it sells for, why would I not just walk away ?
Hi Billy,
After a deed in lieu, the lender will not be able to come after you for the deficient balance. The lender forgives the deficient balance. I think that the collection agency can be a scam. You can ask the collection agency to validate your debts. You may even contact an attorney who may help you in dealing with them.
Hi comso,
If you go for a deed in lieu, you won't be liable for the balance amount resulting from the sale. However, if you walkaway from the property, then the lender would foreclose your home and you'll have to pay the balance amount to the lender.
After a deed in lieu, the lender will not be able to come after you for the deficient balance. The lender forgives the deficient balance. I think that the collection agency can be a scam. You can ask the collection agency to validate your debts. You may even contact an attorney who may help you in dealing with them.
Hi comso,
If you go for a deed in lieu, you won't be liable for the balance amount resulting from the sale. However, if you walkaway from the property, then the lender would foreclose your home and you'll have to pay the balance amount to the lender.
I pay PMI in Florida and the bank might not agree to a deed in lieu, then I would suffer the amount after forclosure. What means do I have to make the bank accept the DIL ? Or how do they chase me in Michigan ?
we have tried for a loan modification but they are stroking us in every direction for many months so we will probably have to foreclose because i only have a part time job-the house is under water-my husband is handicapped and my unemployment benefits will be ending in june....ant idea how long one is able to stay in the house once payments are stopped? and what can i expect to happen after stopping mortgage and tax payments
thank you-- signed, very scared
thank you-- signed, very scared
Hi!
Welcome to forums!
To Cosmo,
Depending upon your financial situation, the lender would let you know whether or not he would accept your deed in lieu of foreclosure. If you can convince your lender about your financial hardship, then he would accept it. Once the lender accepts your request, he would forgive the deficient balance resulting from the sale. Thus, the lender won't chase you in Michigan for the balance debt.
To Guest,
The lender will start foreclosure procedure if you do not make payments for 3 months in a row. After the foreclosure sale is over, you would get a 3 days notice to leave the property. You will have to move out of the property within that time period.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To Cosmo,
Depending upon your financial situation, the lender would let you know whether or not he would accept your deed in lieu of foreclosure. If you can convince your lender about your financial hardship, then he would accept it. Once the lender accepts your request, he would forgive the deficient balance resulting from the sale. Thus, the lender won't chase you in Michigan for the balance debt.
To Guest,
The lender will start foreclosure procedure if you do not make payments for 3 months in a row. After the foreclosure sale is over, you would get a 3 days notice to leave the property. You will have to move out of the property within that time period.
Feel free to ask if you've further queries.
Sussane
What happens to the 2nd mortgage if I do the deed-in-lieu transfer? Do I have to take out a personal loan to pay off the 2nd mortgage?
Though you apply for a deed in lieu with your first lender, you would still be responsible for the second loan. You will have to pay it off. You can take out a personal loan in order to do so.
how does a deed in lieu effect a 2nd mortgage?
hi xbrooklyngrl,
if there is a second mortgage, then you will have to pay off the second mortgage dues to the lender though the first lender pursues a deed in lieu of foreclosure. the second mortgage lender will not forgive his dues.
thanks
if there is a second mortgage, then you will have to pay off the second mortgage dues to the lender though the first lender pursues a deed in lieu of foreclosure. the second mortgage lender will not forgive his dues.
thanks
How much time will i have to find another house to lease?
After a deed in lieu of foreclosure, you may get a notice from your lender to leave the property within 3 days. You will have to move out of the property within that period of time. Thus, it's better to find a house as soon as you apply for a deed in lieu.
We fell behind in payments when my husband lost his job and we tried the loan modification program which was denied. Then the bank tried to do an inhouse modification, but after seeing our income and expenditure figures, are unable to come up with anything. When i asked the options, they suggested a Deed in Lieu. If I accept this option, how much time do I have to stay in the house; (2) will it affect my credit history; (3) will I be still be liable for the short sale if this happens. How much time do i have to move out of the house once i agree to the Deed in Lieu?