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 can't afford my home even when i do loan modification, i put the home for short sale but i have no offers yet. i feel deed in lieu of foreclosure is my left option. my question is how bad will it affect my credit and what are the things i need to do to make sure i have no liability
Welcome assumpta,
A deed in lieu of foreclosure will reduce your score by 250 points. You won't be liable for the deficient balance as the lender will forgive it.
A deed in lieu of foreclosure will reduce your score by 250 points. You won't be liable for the deficient balance as the lender will forgive it.
As I recall, there is a nominal payment made to the borrower for the deed in lieu, is that true?
Hi Reggie!
Welcome to forums!
I haven't heard about nominal payments made to the borrower in case of a deed in lieu of foreclosure. However, there is something called cash for keys offer. In this case, the bank may give a cash settlement to the homeowner in exchange for vacating his or her foreclosed home.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
I haven't heard about nominal payments made to the borrower in case of a deed in lieu of foreclosure. However, there is something called cash for keys offer. In this case, the bank may give a cash settlement to the homeowner in exchange for vacating his or her foreclosed home.
Feel free to ask if you've further queries.
Sussane
My dilema is that I have 3 months of payments behind at this point. I want to give it up, but not until November of or December. I will pull the trigger on a deed in lieu by requesting it from the lender; but I don't know when to pull that trigger. Should I keep payin the insane mortgage and stay under the three month late or what?
I live in California and have a property in Texas I'm trying to short sell due to lack of tenants. There is a 1st and 2nd for a total of about 140k. Our first offer was countered by the bank and the buyer walked and now I'm close to forclosure. Should I continue to try and find a buyer or let it go or do a deed in lieu. I'm behind in payments 6 months at this point as well so my credit score which used to be high 700's is probably shot now.
Suggestions or comments welcome
Suggestions or comments welcome
Hi Reggie,
As you are already late on your mortgage payments, you can contact your lender and apply for a deed in lieu of foreclosure now. There are chances that the lender will accept your deed in lieu of foreclosure request in such situation. The lender will sell off the property to recover his dues.
To Jcamp,
As you are already 6 months deliqneunt, the lender has the rights to foreclose the property. You can apply for a deed in lieu of foreclosure in order to get rid of your property. However, your scores would go down by 250 points.
Thanks
As you are already late on your mortgage payments, you can contact your lender and apply for a deed in lieu of foreclosure now. There are chances that the lender will accept your deed in lieu of foreclosure request in such situation. The lender will sell off the property to recover his dues.
To Jcamp,
As you are already 6 months deliqneunt, the lender has the rights to foreclose the property. You can apply for a deed in lieu of foreclosure in order to get rid of your property. However, your scores would go down by 250 points.
Thanks
I would like to know how to receive the $3500.00 for moving out early with Bank of america short sale. What forms I fill out also what forms for taxes.
[Email address and phone number deleted as per forum rules. Thanks.]
[Email address and phone number deleted as per forum rules. Thanks.]
i try to work with my bank the payment the offerred to me is to high in the mod is the taxes to be paid if i do the deed in lieu if i have a fha insured loan
Hi!
Welcome to forums!
To Richie,
Are you looking for the cash for keys option? It will be the lender's discretion whether or not he would give you the option.
To CV,
If you go for a deed in lieu of foreclosure, the lender won't come after you for the deficient balance. This forgiven amount will be considered as your income and the IRS may charge taxes. However, depending upon the Mortgage Debt Relief Act, you may not have to pay the taxes.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To Richie,
Are you looking for the cash for keys option? It will be the lender's discretion whether or not he would give you the option.
To CV,
If you go for a deed in lieu of foreclosure, the lender won't come after you for the deficient balance. This forgiven amount will be considered as your income and the IRS may charge taxes. However, depending upon the Mortgage Debt Relief Act, you may not have to pay the taxes.
Feel free to ask if you've further queries.
Sussane
Hi JessicaI have a question in 2008 we bought a home in FL at 283k we had 3 kids at the time, we now have 5 kids and the house is becoming very small . And w/one salary and increasing taxes the payment is becoming difficult to pay each month Also since the house has no equity i feel as if we are just throwing $$ away each month. I can not sell it b/c its worth 200K and i owe 265k on it still. We need a bigger home as well w/the kids. We have missed a few payments and the bank put us in that home affordable program but we keep getting the run around saying it takes months to finish the review does a deed in Lieu help us ? What are options ?
We have a deed in lieu of forclosure from about 2 years ago, we are slowly rebuilding our credit, but our credit report is showing a forclosure not a deed in lieu of, also it is showing we have a balance although we were told by WF their would be no balance. I have disputed this but it cam back that the information was correct?? Is this true?
We have been offered this through pinnacle recovery who represents Tahiti Village in Las Vegas. We cant afford the payments. Is this a smart thing to do. They said we would be free of all obligations. Thank You
i had a short sale with a home equity line of credit attached. I had the helic charged off and had to sign a note that i would pay that heloc off. THey are now comming after me for it calling me . I dont have the money for it. I hang up on them . what could be the consequences . Also on the short sale I tried to have the deficiency dismissed before I signed off on it but they left it open and said that is how they do things. I was told by the bank that I will see if I have a 1099 or not . I was told by other sites that they can come after you for this . I want it resolved and do not have ot look over my shoulder for the next years. I am told they can keep comming after you for the next 5 years. How can I resolve this. I am afraid to call the bank now that the Short sale is over but I don't know what to do or how it will affect me if I want to buy another house in the future. Is there also a statue of limitations.I would rather get this resolved instead of having to look over my shoulder for the next 5 years.
hoopde
hoopde