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?
Hi Kurtis,
Welcome to forums.
I can understand what you're going through right now and indeed it's very disheartening.
Renting in Georgia will be a good option as far as your situation is concerned. Now regarding the two mortgages, I should say you can try out with the sale of the home whereby you'll be able to pay off at least 500K of the loan balance. But I'm not sure whether you have the funds to pay off the remaining balance. Do you have any savings or investments as such?? If not, well then you may try for paying off at least the first mortgage through the sale, a part of the Heloc also with the sale proceeds and then the rest can be forgiven by the lender provided you can prove that you're in financial hardship. I guess you're in a hurry to shift to Georgia or else I would have asked you to opt for an alternative payment plan.
Hope this helps. If you have further queries, please feel free to come up with it.
God bless you.
Samantha
Welcome to forums.
I can understand what you're going through right now and indeed it's very disheartening.
Renting in Georgia will be a good option as far as your situation is concerned. Now regarding the two mortgages, I should say you can try out with the sale of the home whereby you'll be able to pay off at least 500K of the loan balance. But I'm not sure whether you have the funds to pay off the remaining balance. Do you have any savings or investments as such?? If not, well then you may try for paying off at least the first mortgage through the sale, a part of the Heloc also with the sale proceeds and then the rest can be forgiven by the lender provided you can prove that you're in financial hardship. I guess you're in a hurry to shift to Georgia or else I would have asked you to opt for an alternative payment plan.
Hope this helps. If you have further queries, please feel free to come up with it.
God bless you.
Samantha
How am I going to have to show the Chase HELOC "people" that I am in financial hardship ? If I can't do that to their satisfaction, would I be able to negotiate paying them all but appx 50k and then agree to set up a repayment plan to pay them back ? How would that work regarding title ? If Chase 1st Mortgage is paid in full, I understand that they would release their "hold" on title, but how would Chase HELOC do the same ? Thanks again and God Bless...
Hi Kurtis,
Welcome back to the forums.
I guess what Samantha meant was that, if you're having problems in paying off both the loans in full, then explain it to the company. Tell them that there are certain liabilities for which you have to pay additionally and perhaps which weren't there initially when you opted for the loan, right? I guess a letter properly explaining your problems in paying off the loan would do. And, if you feel that's not a convincing one or if it does not work, then do try to negotiate with the company.
If they are willing to co-operate with you, they might agree to the 50K or else they might just want to raise it a bit and then allow you to follow a repayment plan for the rest of the balance. Regarding title, you will hold the title until and unless you pay off the debt using the repayment plan. But I guess, you can stay in some other property although legally this property will have your name on the title till the pay off is over.
If you pay off the entire first mortgage, Chase will have no hold of the first right? But they'll still have an interest in your property as far as the HELOC is concerned and that interest is worth the loan balance on the HELOC only. I don't think they would go for a foreclosure due to the second but they might charge off the loan. That is, they'll forgive it (cancel it actually) if they feel you won't be able to really pay off the second loan.
As a result, you need not pay off the second loan balance - it no longer remains your obligation but within a certain time period you can still pay just to improve your credit. And, if there's a charge-off, there's every possibility that the IRS may impose taxes on the amount forgiven.
Take Care and do feel free to discuss further with us and get clarified.
Welcome back to the forums.
I guess what Samantha meant was that, if you're having problems in paying off both the loans in full, then explain it to the company. Tell them that there are certain liabilities for which you have to pay additionally and perhaps which weren't there initially when you opted for the loan, right? I guess a letter properly explaining your problems in paying off the loan would do. And, if you feel that's not a convincing one or if it does not work, then do try to negotiate with the company.
If they are willing to co-operate with you, they might agree to the 50K or else they might just want to raise it a bit and then allow you to follow a repayment plan for the rest of the balance. Regarding title, you will hold the title until and unless you pay off the debt using the repayment plan. But I guess, you can stay in some other property although legally this property will have your name on the title till the pay off is over.
If you pay off the entire first mortgage, Chase will have no hold of the first right? But they'll still have an interest in your property as far as the HELOC is concerned and that interest is worth the loan balance on the HELOC only. I don't think they would go for a foreclosure due to the second but they might charge off the loan. That is, they'll forgive it (cancel it actually) if they feel you won't be able to really pay off the second loan.
As a result, you need not pay off the second loan balance - it no longer remains your obligation but within a certain time period you can still pay just to improve your credit. And, if there's a charge-off, there's every possibility that the IRS may impose taxes on the amount forgiven.
Take Care and do feel free to discuss further with us and get clarified.
I am confused as to how I would hold title on a home that I sell to someone else ? wouldn't that person NOT be willing to do such a thing ? I would think that anyone buying my house would require that all liens be cleared before agreeing to purchase, right ? So, in my mind, the only option I have is to sell my home for whatever I can get for it, pay off Chase 1st Mortgage of 415k APPX,,,,and as much as the 150k I CAN pay with the balance, get Chase Home Equity to accept and release the title to the new owner, right ? At that point, I either have the "short" payment of the 150k forgiven ( ideal, but will impact my credit ) or arrange a repayment of that money ( which realistically we will not be able to afford ). In either case, again, I don't see how any proposed owner of my home would agree to have me still on title and attached to a debt on the house. Sorry for any repetition. God Bless you all !
Hi Kurtis,
I didn't actually mean that you can hold title once the house is sold off through a short sale. What I meant was, you do a short sale and get the proceeds. Using the proceeds, you can pay off the first mortgage entirely and a part of the second.
Now if you can prove to the lender that you are in financial hardship, then he might forgive the remaining part of the mortgage debt. As you said, you will not be able to afford the heloc, so if you can prove that you are financially not that sound enough to pay for it, then perhaps Chase will be ready to forgive it. Talk to them about it and only then arrange for the short sale. And, also, if you are going for the sale, do contact a real estate agent who can give you the right guidance.
Take Care
I didn't actually mean that you can hold title once the house is sold off through a short sale. What I meant was, you do a short sale and get the proceeds. Using the proceeds, you can pay off the first mortgage entirely and a part of the second.
Now if you can prove to the lender that you are in financial hardship, then he might forgive the remaining part of the mortgage debt. As you said, you will not be able to afford the heloc, so if you can prove that you are financially not that sound enough to pay for it, then perhaps Chase will be ready to forgive it. Talk to them about it and only then arrange for the short sale. And, also, if you are going for the sale, do contact a real estate agent who can give you the right guidance.
Take Care
i have a property from a previous marraige and have now remarried. i was leasing the property will the options to buy and my tenat just defaulted on the lease agreement. i can't afford this property and my current one together what are my options of getting rid of it since i don't think i can sell it for what i owe?
I have a home which we sold to my brother-in-law under a land contract. However he has not made his payments on time since the first payment and we are starting to fall behind in our own bills. The current mortgage on the property is less then 30 days late but I do not know how much longer we can make two mortgage pays. How would the lender take a request for a deed in lieu of at this point.
Welcome Brad,
Is the difference between what you can sell the property for and what you owe quite large? I suppose you cannot afford to pay the mortgage on this property any more. Is that so? Do you have any insurance policy so that you can pay off the loan? or else, talk to he lender and discuss about possible options. And, be positive, things will work out well if you can explain to the lender everything about your situation.
Thanks.
Is the difference between what you can sell the property for and what you owe quite large? I suppose you cannot afford to pay the mortgage on this property any more. Is that so? Do you have any insurance policy so that you can pay off the loan? or else, talk to he lender and discuss about possible options. And, be positive, things will work out well if you can explain to the lender everything about your situation.
Thanks.
Bobbie, have a talk with the lender and find out what he says. That's the best thing you can do at this stage. For the lender to accept a deed-in-lieu, you should be someone who's in default or else who is in financial hardship and may not be able to pay off the loan. But you aren't in default and it's just that you feel you may not be able to repay.
One more thing is that, if you are not sure whether you will be able to pay off the loan, you can seek help from a financial advisor. He will be able to analyze your finances and help you organize your finances by preparing a budget for you. I think it will help you.
One more thing is that, if you are not sure whether you will be able to pay off the loan, you can seek help from a financial advisor. He will be able to analyze your finances and help you organize your finances by preparing a budget for you. I think it will help you.
Thanks for the advice Alex. I think I am just feeling a little overwhelmed right now. As the go between in this it has been frustrating to say the least. You are correct when you say a budget may help. Usually I plan them but never follow through. Discipline is not my best area.
Welcome Sopissedo,
I think you're right - not everyone is very disciplined but at times, it does help. A budget need not be that accurate, you know if it's a simple listing of my expected expenses and what i have actually spent, i would call it a budget. It's the way we want it to be. I've never tried to prepare a budget as a counselor does but it helps me carry out my daily expenses and save quite a few bucks for the extra things that I do.
I think you're right - not everyone is very disciplined but at times, it does help. A budget need not be that accurate, you know if it's a simple listing of my expected expenses and what i have actually spent, i would call it a budget. It's the way we want it to be. I've never tried to prepare a budget as a counselor does but it helps me carry out my daily expenses and save quite a few bucks for the extra things that I do.
Due my lower monthly income that I can not pay month mortgage payment of $1668. I have to give this house to lender "deed in lieu'. Could you help me?
Hello Jun,
I think it is better to talk to your lender about this. If he is willing to accept a deed in lieu, you may do that. But I think you need to have some late payments before doing that and your lender might also ask you to go for a short sale.
Could you specify what kind of help you are looking for?
I think it is better to talk to your lender about this. If he is willing to accept a deed in lieu, you may do that. But I think you need to have some late payments before doing that and your lender might also ask you to go for a short sale.
Could you specify what kind of help you are looking for?
is the deed in lieu allowed in all states such as ohio
we dont want to foreclose on the house maybe the deedin lieu would be better for us