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 Tom,
It is true that if you sell off your property with the help of a deed in lieu of foreclosure, then you won't be liable for the deficient balance resulting from the sale of the property. However, it'll have a negative affect on your credit score. The score will get reduced by 250 points.
Hi hoopde,
After a short sale, the lender has the rights to come after you for the deficient balance. Moreover, the HELOC has been charged off. Thus, the collection agency has the rights to ask you for the balance dues. Rather than hanging up on them, you should try and settle the dues with them. This will be a better option to deal with them. If you hang up on them, then the collection agency may sue you for the debt at the court house.
Take care.
It is true that if you sell off your property with the help of a deed in lieu of foreclosure, then you won't be liable for the deficient balance resulting from the sale of the property. However, it'll have a negative affect on your credit score. The score will get reduced by 250 points.
Hi hoopde,
After a short sale, the lender has the rights to come after you for the deficient balance. Moreover, the HELOC has been charged off. Thus, the collection agency has the rights to ask you for the balance dues. Rather than hanging up on them, you should try and settle the dues with them. This will be a better option to deal with them. If you hang up on them, then the collection agency may sue you for the debt at the court house.
Take care.
I'm wanting to present a deed in lieu to Citimortgage. Has anyone had luck with this company? Please let me know what avenues to take with them. Thanks, Tom
Hi Tombo,
Individual situations differ and depending upon individual situations, the lender will let the borrower know whether or not the request for deed in lieu of foreclosure will be accepted.
I would suggest you to contact your lender and apply for a deed in lieu of foreclosure. If you are already 2-3 months delinquent on your mortgage payments, then it would be easier for you to get the deed in lieu of foreclosure.
Thanks,
Jerry
Individual situations differ and depending upon individual situations, the lender will let the borrower know whether or not the request for deed in lieu of foreclosure will be accepted.
I would suggest you to contact your lender and apply for a deed in lieu of foreclosure. If you are already 2-3 months delinquent on your mortgage payments, then it would be easier for you to get the deed in lieu of foreclosure.
Thanks,
Jerry
my now x boyfriend and i have lived together in my current residence since 2004 we bought together. in 2006 he refinanaced to his name only for the note but title still in my name also he started a realationship with someone else and left the house on 3/28/10. he decided he was not going to pay for the house anymore and i am still here trying to find a home. i found a home but need to do a quit claim deed so the property is all for him do i need his signigture to release me also he may be at the point of pre forclosure and i was told my undrewriter may not let me have a loan if it is in forclosure i was never told that, because even though he did not want to live here he wanted to have me evicted so i did not do a quit claim earlier. is there any hope.
hi sandy,
if your name is on the property deed, then you need to sign a quit claim deed and transfer it to him. as far as the mortgage is concerned, if your name is mentioned on it, then your ex-boyfriend needs to refinance the loan. thus, you won't be liable for the property or the mortgage.
thanks
if your name is on the property deed, then you need to sign a quit claim deed and transfer it to him. as far as the mortgage is concerned, if your name is mentioned on it, then your ex-boyfriend needs to refinance the loan. thus, you won't be liable for the property or the mortgage.
thanks
I f I short sale my home how many points will drop off my credit score?
wWhat would I have to pay if my home in FL which has not sold now for 3 1/2 years settles with a deed in lieu? I am presently living in a home we bought in NC 3 years ago.
Hi Jien,
A short sale will reduce your credit score by 75-100 points. To know more in this regard, check out the given page:
http://www.mortgagefit.com/discuss/shortsale-crediteffect.html
Hi Putt,
If the lender sells off your property through a deed in lieu of foreclosure, you won't be liable for paying the deficient balance to the lender. Though the forgiven balance dues will be considered as your income, you won't have to pay taxes depending upon the Mortgage Debt Relief Act.
A short sale will reduce your credit score by 75-100 points. To know more in this regard, check out the given page:
http://www.mortgagefit.com/discuss/shortsale-crediteffect.html
Hi Putt,
If the lender sells off your property through a deed in lieu of foreclosure, you won't be liable for paying the deficient balance to the lender. Though the forgiven balance dues will be considered as your income, you won't have to pay taxes depending upon the Mortgage Debt Relief Act.
My husband and I are both in our late 60s. He is retired and draws social security. I have a full-time job and also draw social security. We currently own a home with a mortgaqe and a line of credit. Due to my health it looks as if I may have to totally quit my job which would be a very large decrease in income. My husband is also unable to continue to maintain the house and the yard because of his heart problems We are moving out of the house and have gotten an apartment. We are upside down in this house as we bought it during the boom and it was appraised for much more than it is worth. We are thinking about renting the house but don't believe we could get enough rental income to make the payments and keep it up. We are also thinking about just letting it go into foreclosure and giving it back to the bank. How would that work with the line of credit. My credit rating is not much important at this time. Our payments are current on both the mortgage and line of credit.
My husband has a home from his previous marriage that we have been trying to sell for almost 2 years with no luck. We purchased a new home so we could be closer to our jobs, after the purchase I actually had to switch jobs and my new salary is $ 20,000.00 less. We cannot afford both homes and the house is just not going to sell.. would we benefit from the deed in lieu? i dont really see any other options at this point..
Foreclose proceedings on my house , which is paid for, has begun due to unpaid property taxes. Can I transfer the deed on my property to someone else who is able to pay these taxes in full and relinquish my ownership to them?
Hi lawgal,
As you want to get rid of the property and you are not so concerned about your credit score, a deed in lieu of foreclosure is a good option for you. You can surrender the property to the lender and he will sell it off to recover the mortgage dues.
Hi Maureen,
If you're not concerned about your credit score, then a deed in lieu of foreclosure is a good option for you. You should remember that a deed in lieu of foreclosure will reduce your score by 250 points.
Hi Nikki,
Transfer of property in this situation can be considered as fraudulent. If someone else can pay off the taxes on your behalf, then they should first pay off the taxes and then you can relinquish the ownership to them.
Thanks
As you want to get rid of the property and you are not so concerned about your credit score, a deed in lieu of foreclosure is a good option for you. You can surrender the property to the lender and he will sell it off to recover the mortgage dues.
Hi Maureen,
If you're not concerned about your credit score, then a deed in lieu of foreclosure is a good option for you. You should remember that a deed in lieu of foreclosure will reduce your score by 250 points.
Hi Nikki,
Transfer of property in this situation can be considered as fraudulent. If someone else can pay off the taxes on your behalf, then they should first pay off the taxes and then you can relinquish the ownership to them.
Thanks
I am think of this and I was told that I would receive 3000.00 from the mortgage company is that true.
we have tried to short sale our house for over a year now--we have had three different offers but lose them because we have a small (20,000) second mortgage that will not agree to the sale. is it better to foreclose or apply for deed in lieu at this point? thanks so much.
Hi tracy,
I guess you're speaking about the keys for cash option wherein the lender offers cash to the borrower for surrendering the keys. You can request the lender for this option. Whether or not the lender would give you this option will depend upon his discretion.
Hi anonymousfl,
You can apply for a deed in lieu of foreclosure with your first lender. However, in this case, too, the second mortgage lender has to agree to the sale.
Take care.
I guess you're speaking about the keys for cash option wherein the lender offers cash to the borrower for surrendering the keys. You can request the lender for this option. Whether or not the lender would give you this option will depend upon his discretion.
Hi anonymousfl,
You can apply for a deed in lieu of foreclosure with your first lender. However, in this case, too, the second mortgage lender has to agree to the sale.
Take care.