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?
My husband and I were medically retired from our jobs. We will receive disability payments for the rest of our lives. The amount is significantly less than what we earned while working. We currently have an interest only loan and was informed by our mortgage company that our loan will be increasing by $ 600.00 per month due to change in loan. If we can no longer live comfortably to pay the " new" payment and opt for Deed in Lieu of, would we have great difficulties in purchasing another home in the state we reside in or if we move out of State?
My second question is because we would not qualify for a loan modification due to a modest college savings account, could the lender come after our assets?
My second question is because we would not qualify for a loan modification due to a modest college savings account, could the lender come after our assets?
Hi!
Welcome to forums!
To Mrs. Ainsworth,
If the mortgage is in your name, then the deed in lieu of foreclosure will have a negative affect on your credit score. Your score would get reduced by 250 points and it will remain as a negative mark on your credit report for the next 7 years. Also, you won't be able to get a mortgage in the next 3-4 years.
To Kfair,
The lender forgives the deficient balance resulting from the deed in lieu of foreclosure. He will not come after you for the balance amount. However, the forgiven debt will be considered as your income by the IRS and they will charge you taxes for that amount. But again, depending upon the Mortgage Debt Relief Act, you will not be required to pay the taxes on the forgiven debt.
To SMB,
If you file a deed in lieu of foreclosure with your lender and sell off your property, you won't be able to get approved for a loan within the next 3-4 years. You can rent a property for the time being, improve your credit score and then look out for loans to purchase a property. After a deed in lieu, the balance amount is forgiven by the lender. Thus, he won't come after your other assets.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To Mrs. Ainsworth,
If the mortgage is in your name, then the deed in lieu of foreclosure will have a negative affect on your credit score. Your score would get reduced by 250 points and it will remain as a negative mark on your credit report for the next 7 years. Also, you won't be able to get a mortgage in the next 3-4 years.
To Kfair,
The lender forgives the deficient balance resulting from the deed in lieu of foreclosure. He will not come after you for the balance amount. However, the forgiven debt will be considered as your income by the IRS and they will charge you taxes for that amount. But again, depending upon the Mortgage Debt Relief Act, you will not be required to pay the taxes on the forgiven debt.
To SMB,
If you file a deed in lieu of foreclosure with your lender and sell off your property, you won't be able to get approved for a loan within the next 3-4 years. You can rent a property for the time being, improve your credit score and then look out for loans to purchase a property. After a deed in lieu, the balance amount is forgiven by the lender. Thus, he won't come after your other assets.
Feel free to ask if you've further queries.
Sussane
can i do short sale even if the person in the grant deed dont want to do shortsale
Hi bernard,
In order to sell off the property, all the co-owners will have to sign the property deed. If one of the co-owners does not sign the deed, then you won't be able to short sale the property.
In order to sell off the property, all the co-owners will have to sign the property deed. If one of the co-owners does not sign the deed, then you won't be able to short sale the property.
Hi, we were approved for a loan mod for more than our actual mortgage was!! We don't want foreclosure, and our only option seems to be a deed in lieu. My question is...if we sign a deed in lieu, how long are we allowed to stay on our property? Do they say, "thanks for signing now be out in 2 weeks"?! Or do you have 30 days? What's the time-line? Thanks for any advice. We're in Cleveland, OH if that makes any difference.
As far as I know, you would be able to stay in the property until the sale is over. After the sale, you would get a notice period of 3 days to leave the property. You'll have to leave the property within that time period.
Our home has been on the market as a short sale for several months now and has not gotten an offer. The bank said it would do a deed in lieu of forclosure for $3000. She we do this? Also I spoke with a lender who told me the underwriters in Idaho consider a deed in lieu the same as a foreclosure. Why is this?
We were given a two year loan modification and are still have difficulty making the loan payment because of all our other dedt. It is possibe to request a deed in lieu when you have a short term modified loan
Hi jenmp,
Deed in lieu is more or less the same as foreclosure. Both of them will have similar effects on your credit report. You score would get reduced by 250 points and you won't be able to qualify for a loan in the next 3-4 years. However, the major difference lies in the fact that in case of a deed in lieu, you won't be liable for the deficient amount resulting from the sale of the property. If you are unable to pay the deficient amount, then deed in lieu is a good option for you.
To c.ness,
Your query has been replied to in the given page:
http://www.mortgagefit.com/inprocess/about36986.html#158785
Deed in lieu is more or less the same as foreclosure. Both of them will have similar effects on your credit report. You score would get reduced by 250 points and you won't be able to qualify for a loan in the next 3-4 years. However, the major difference lies in the fact that in case of a deed in lieu, you won't be liable for the deficient amount resulting from the sale of the property. If you are unable to pay the deficient amount, then deed in lieu is a good option for you.
To c.ness,
Your query has been replied to in the given page:
http://www.mortgagefit.com/inprocess/about36986.html#158785
I have a house that was supposed to be a "quick" turn around investment. Needless to say this is now a loosing rental property that is very upside down! I currently owe $184,000.00 and was told by several realators that I would be lucky to get 149,000.00 and that is with out there chunk. I am not behind on payments but i will not be able to last much longer because my tenant is now not paying rent. To make things worse I have my residential property that is part of the collatteral. This house has about $90,000.00 in equity. The problem is that we already are completely tapped out and could not even afford a larger payment if we tryed! Is this still a possibility "deed in lieu" What do you recomened.
For a DIL should an attorney be hired to deal with the bank or is it better to handle myself?
Hi Guest,
You are in a tough situation. I would suggest you to have a word with your lender and apply for a deed in lieu. I did not exactly understand, what you wanted to mean when you said – "To make things worse I have my residential property that is part of the collateral."… Can you explain this, please?
Hi lckgone,
I've given my suggestions in regards to your query at:
http://www.mortgagefit.com/problems/deedinlieu-attorney-help.html
Take a look at it. Hope it helps you.
Thanks
You are in a tough situation. I would suggest you to have a word with your lender and apply for a deed in lieu. I did not exactly understand, what you wanted to mean when you said – "To make things worse I have my residential property that is part of the collateral."… Can you explain this, please?
Hi lckgone,
I've given my suggestions in regards to your query at:
http://www.mortgagefit.com/problems/deedinlieu-attorney-help.html
Take a look at it. Hope it helps you.
Thanks
Jessica, you seem super smart. I am uspside down on my house here in WA by about 40k to sell and pay a realtor would be about 60K out of pocket which I can not afford. I own a house in CA that I will be moving back to in 4 years. I contacted the lender about loan modification and they were only able to get the payment down by $800, not enough. Would a deed in leiu be my best option and how much will that end up costing me in dollars? My loan is for 400K and my house is worth about 370K. I have no seconds on the house and no other debts so I am not even considering bankruptcy, I simply can't afford my house due to job loss and hospital bills. Sound advice would be greatly appreciated. Thanks!!
Hi watsonsh,
If you want to get rid of the property, then a deed in lieu is a good option for you. However, though it will help you in get rid of the property and you won't be liable for paying off the deficient amount, it will lower your credit score by 250 points. Also, it will remain on your credit report for 7 years and you won't be able to qualify for a loan in the next 3-4 years.
Thanks
If you want to get rid of the property, then a deed in lieu is a good option for you. However, though it will help you in get rid of the property and you won't be liable for paying off the deficient amount, it will lower your credit score by 250 points. Also, it will remain on your credit report for 7 years and you won't be able to qualify for a loan in the next 3-4 years.
Thanks
i BOUGHT MY HOME 1 YR AGO IN FL. i AM NOW UNABLE TO MAKE MORTGAGE PMTS, i HAVE BEEN MAKING LESSER PMTS WITH WELLS FARGO EACH MNTH TO LEARN I NOW HAVE A 6,000 BALLOON PMT. I THOUGHT I HAD A FIXED RATE. THEY SAID I DO. I AM NOW FACIENG FORCLOSRE OR EITHER DEED IN LIEU. WHAT WILL I BE LIABLE FOR. CAN THEY GARNISH MY WAGES.