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?
how does an upside down mortgage affect a deed in lieu? and in a divorce situation, what if one party owns land with a brother and 3 cousins in another state?
Hi john!
Welcome to forums!
A deed in lieu of foreclosure will help you in getting rid of the upside down property. You will be able to sell off the property. If the sale results into a deficient balance, then you and your siblings will not be liable to pay it. However, if all of you are on the mortgage, then it will affect your credit scores badly and it will be reduced by 250 points.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
A deed in lieu of foreclosure will help you in getting rid of the upside down property. You will be able to sell off the property. If the sale results into a deficient balance, then you and your siblings will not be liable to pay it. However, if all of you are on the mortgage, then it will affect your credit scores badly and it will be reduced by 250 points.
Feel free to ask if you've further queries.
Sussane
hello,
i am/was the only earning member of my family and had bought a condo in 2005. then, in sept 2009, i lost my job of 6 years. since then i am not able to find another job though there were many interviews. last month, i got another bad news about my father's diagnosis of stage 4 liver cancer. i had to take an overseas trip to see him. he passed away after about a month of hospital stay. from accumulated hospital bills and the overseas trip not to mention 4 weeks of staying away from job search, i have borrowed heavily and could not make mortgage payments. i had also applied for mortgage modification to the lender bank after losing my job but they denied twice and now offering short sale or deed-in-lieu. which option is better? i also have second mortgage on my house. how would it affect the second mortgage in either case? my first priority is/was to keep the home but bank is not budging from its stand and whole situation looks very difficult.
your suggestion would be very helpful to make an appropriate decision and sincerely be appreciated.
i am/was the only earning member of my family and had bought a condo in 2005. then, in sept 2009, i lost my job of 6 years. since then i am not able to find another job though there were many interviews. last month, i got another bad news about my father's diagnosis of stage 4 liver cancer. i had to take an overseas trip to see him. he passed away after about a month of hospital stay. from accumulated hospital bills and the overseas trip not to mention 4 weeks of staying away from job search, i have borrowed heavily and could not make mortgage payments. i had also applied for mortgage modification to the lender bank after losing my job but they denied twice and now offering short sale or deed-in-lieu. which option is better? i also have second mortgage on my house. how would it affect the second mortgage in either case? my first priority is/was to keep the home but bank is not budging from its stand and whole situation looks very difficult.
your suggestion would be very helpful to make an appropriate decision and sincerely be appreciated.
Hi Rahul!
Welcome to forums!
If you cannot afford to keep the property, then a deed in lieu of foreclosure will be considered as a good option to get rid of it. In this case, you won't be liable for the deficient amount resulting from the sale of the property. However, it will definitely affect your credit score badly.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If you cannot afford to keep the property, then a deed in lieu of foreclosure will be considered as a good option to get rid of it. In this case, you won't be liable for the deficient amount resulting from the sale of the property. However, it will definitely affect your credit score badly.
Feel free to ask if you've further queries.
Sussane
My father passed away in January, my mother is currently residing in their home and paying the mortgage that contains both of their names. The problem, it is an upside down mortgage, run down house, my mom can afford the mortgage payment because of ACORN but she cannot afford to maintain the house or the utilities. The house could never be listed for sale because nothing would pass inspection. Where do I turn?
What type of wording should I look for or have in the agreement that eliminate me of title and mortgage obligations?
what if you have a pretty good size equity line of credit on the home in addition to the first mortgage company...I understand how the process works if only a first mortgage but what if say i owe $215,000 on first and $82,000 on second equity line and home is now only valued at $165,000
Hi Guest,
Your mother is in a tough situation. I would suggest you to contact a real estate agent and check out if he can help you in this matter. He may suggest you ways to sell off the property.
Hi PJ,
If you're applying for a deed in lieu of foreclosure, then you won't be liable for the deficient balance resulting from the sale of the property. I don't think you will have to sign a deed in this regard.
Hi Juanita,
Though your property is sold off with the help of a deed in lieu of foreclosure, you would remain responsible for paying off the dues of the second mortgage lender. The second lender will have the rights to come after you for the loan balance.
Your mother is in a tough situation. I would suggest you to contact a real estate agent and check out if he can help you in this matter. He may suggest you ways to sell off the property.
Hi PJ,
If you're applying for a deed in lieu of foreclosure, then you won't be liable for the deficient balance resulting from the sale of the property. I don't think you will have to sign a deed in this regard.
Hi Juanita,
Though your property is sold off with the help of a deed in lieu of foreclosure, you would remain responsible for paying off the dues of the second mortgage lender. The second lender will have the rights to come after you for the loan balance.
I went through a bankruptcy in 2007. My home was included in it. I did not re-affirm with the bank, but have continued to make my payments. According to the bankruptcy and my lawyer, I am not responsible for any defiency that may occur if say I did a short sale. I recently lost my job of 17 years due to a reduction in force. Is a deed in lieu my best option? I have been rebuilding my credit score and am finally in good shape. Will a deed in lieu do any damage to my credit since I already was granted defiency protection? We have been trying to sell, but our home is in a higher price range than the majority of home buyers in my area can afford. We are willing to walk away. Need some advice.
Hi Bigdaddy!
Welcome to forums!
Rather than going for a deed in lieu, it would be better if you could go for a short sale. You won't be liable for the deficiency as your mortgage has been discharged in your bankruptcy filing. A short sale will reduce your score by 80-100 points whereas a deed in lieu of foreclosure will reduce your score by 250 points.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Rather than going for a deed in lieu, it would be better if you could go for a short sale. You won't be liable for the deficiency as your mortgage has been discharged in your bankruptcy filing. A short sale will reduce your score by 80-100 points whereas a deed in lieu of foreclosure will reduce your score by 250 points.
Feel free to ask if you've further queries.
Sussane
Jessica if you are in the market to buy a house is this a good avenue for people looking to get in a house? Is this something just for someone that owns and is in danger of foreclosure
Welcome Gene,
It is always a good idea to go for home shopping first and then chose which one you can afford to buy. However, if someone is facing foreclosure, then home shopping won't make much sense. The lenders will not be ready to give you a mortgage to buy a new property when he finds that you are facing foreclosure on one of your properties.
It is always a good idea to go for home shopping first and then chose which one you can afford to buy. However, if someone is facing foreclosure, then home shopping won't make much sense. The lenders will not be ready to give you a mortgage to buy a new property when he finds that you are facing foreclosure on one of your properties.
'hi jessica. i have been out of work for a year now and i am in school trying to get my degree. my husband is working but had to take a different job with lower pay. he is not on the note for the house, just me. we are already two months behind on our mortgage and it is not getting any better. we won't be able to stay at our house. how do you suggest we proceed with the deed in lieu? what is our best option?')
We have been working with our mortgage company since Feb. 2009. We were told we qualified for the Making Home Affordable program and have been making modified payments for 7 months. CitiMortgage kept telling us that we would get the paperwork. We never did. We were told in March 2010 that the underwriter had it. We called back the end of March and were told we should be getting final paperwork soon. We called again in April and were told that the loan was discharged (we had filed bankruptcy after we were in the loan modification as my husband's business failed after struggling to keep afloat for 3 years). We attempted to get a new loan based on the approved Making Home Affordable terms we were given in August of 2009. We don't know what to do now. The loan has been discharged with no reaffirmation offer. We sent an offer for a new loan at current market value with the terms they gave us on May 1 ... still no response. We don't know what to do next.
HI MY HOUSE IS IN FORECLOSE BUT I HAVE ANOTHER PROPERY THAT IT IS RENTED DID YOU KW IF I WILL LOOSE MY OTHER HOME TKS