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 bought a home in MD in 2001 w/ the intention of selling it w/in 5yrs (chose loan interest only for 1st 7 years). W/ the economy the value of the property dropped around 45k. I now live in TX and are renting the property in MD for less than the mortgage and it's getting harder to get a renter and cover payments. I want to sell but won't be able to for the amount owed on the loan. I have not been late w/ payments but I feel that I should not keep that property. Having it is making it more difficult to buy a home where I live now but i worry giving it up will not let me get a house b/c it will ruin my credit. Some people have told me to just turn the keys in to the bank b/c I will not be able to refinance b/c i'm under on my loan. Others tell me to try to keep it for a while longer to see if the market improves...seems like I'm wasting my money. Any advice on what I should do..turn in keys, short sale, etc?
thanks!
thanks!
My home is rented and I am still not able to afford it. The renter is not able to pay ontime. Home is in FL assessment about 90k less than what I paid, can I still go to morgage company and ask for deed in lieu We have relocated beacuse of job situation and its not any better with our finances because we still have to try a pay morgage and rent. Lately home insurance was due and we were not able to pay that, behind noe two months. Any suggestions..thanks FL Girl
To anonymous7,
If you turn the keys to the lender, still then, he would foreclose the property which will have a negative affect on your credit score and the lender will come after you for the balance amount. If you cannot afford to pay the balance dues, it's better to go for a deed in lieu of foreclosure in which the lender will forgive the deficient amount. However, your score would get lowered by 250 points and you won't be able to get a mortgage to buy a property for the next 3-4 years.
To Flgirl,
As you're facing hardship in paying off the mortgage dues, you can apply for a deed in lieu of foreclosure in order to get rid of the property. However, you should keep in mind that it would be your lender's discretion whether or not he would accept your request.
If you turn the keys to the lender, still then, he would foreclose the property which will have a negative affect on your credit score and the lender will come after you for the balance amount. If you cannot afford to pay the balance dues, it's better to go for a deed in lieu of foreclosure in which the lender will forgive the deficient amount. However, your score would get lowered by 250 points and you won't be able to get a mortgage to buy a property for the next 3-4 years.
To Flgirl,
As you're facing hardship in paying off the mortgage dues, you can apply for a deed in lieu of foreclosure in order to get rid of the property. However, you should keep in mind that it would be your lender's discretion whether or not he would accept your request.
I live in Louisville, Ky. I lost my job in February 2010, and applied for a modification loan form my mortgage company when i started having problems paying my mortgage after losing my job. It is now August 2010 and still awaiting approval on my modification. I've only had part-time jobs the past few months, but now have obtained full-time employment and will be giving that info to my mortgage co. I am scared they will foreclose if not approved for modification, and am currently four months delinquent on my mortgage. Am I a good candidate for deed in lieu of foreclosure and how do I found out if my bank does these types of deeds?
Hi Del,
As you're delinquent on your mortgage payments, the lender will consider you for deed in lieu of foreclosure. You should contact your lender and apply for the same. Once you speak to the lender, he would let you know whether or not he does deed in lieu of foreclosure.
Take care.
As you're delinquent on your mortgage payments, the lender will consider you for deed in lieu of foreclosure. You should contact your lender and apply for the same. Once you speak to the lender, he would let you know whether or not he does deed in lieu of foreclosure.
Take care.
if i chose to do a deed in lieu do i have to move out of my home right a way or do i get time to find another place for me and my family?
Hi lori,
As far as I know, you'll have to leave the property once the sale is over. Thus, you'll get some time to find another place for your family once you apply for a deed in lieu of foreclosure.
As far as I know, you'll have to leave the property once the sale is over. Thus, you'll get some time to find another place for your family once you apply for a deed in lieu of foreclosure.
If you have a finance by owner and do a deed in leiu of foreclosure will this go on your credit bureau?
Hi GGK!
Welcome to forums!
You're in a tough situation. If you do not make the payments, the lender may foreclose the property and come after you for the deficient balance resulting from the property sale. I would suggest you to contact your lender and apply for a deed in lieu of foreclosure. This'll not only help you in getting rid of the property but you won't be liable for paying the balance dues. But you may not get the 25k, for which you owned the property, from the sale.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You're in a tough situation. If you do not make the payments, the lender may foreclose the property and come after you for the deficient balance resulting from the property sale. I would suggest you to contact your lender and apply for a deed in lieu of foreclosure. This'll not only help you in getting rid of the property but you won't be liable for paying the balance dues. But you may not get the 25k, for which you owned the property, from the sale.
Feel free to ask if you've further queries.
Sussane
My neice had a great job that paid alot of money. She invested in a couple of rentals and was buying her personal home (with two different lenders). She decided to put her personal home up for sale and purchase another more affordable one, then she lost her job. Her previous home has not sold and the bank agreed to a short sale. The other bank agreed to a deed in lieu for the rentals. Finally she got an offer on her previous home but only to find that the bank had slapped leins on this property for the rental deficiency. Keep in mind that the lender on the rentals is not the same lender on the home. Is this legal for them to do? :shock:
Hi Guest,
Though the two lenders are not the same, the lender of her rental property can place a lien on her primary residence. If the primary property is sold at the foreclosure auction, the second lender would be able to receive his dues.
Thanks
Though the two lenders are not the same, the lender of her rental property can place a lien on her primary residence. If the primary property is sold at the foreclosure auction, the second lender would be able to receive his dues.
Thanks
Hi! I'm thinkung into doing a deed in lieu, and I got the application ready.
My question is, does the lender need bank statements from the borrower and co-borrower?
My question is, does the lender need bank statements from the borrower and co-borrower?
Hi Fabian!
Welcome to forums!
The lender will want to check the financial situation of the borrower and co-borrower before agreeing to a deed in lieu of foreclosure. Thus, he may ask the borrower and co-borrower to submit their bank statements.
Sussane
Welcome to forums!
The lender will want to check the financial situation of the borrower and co-borrower before agreeing to a deed in lieu of foreclosure. Thus, he may ask the borrower and co-borrower to submit their bank statements.
Sussane
I am unable to make my mortgage payments.I am going to be moving next month to another state. I also have a lot of credit card debt and am thinking about bankruptcy. Can I obtain a lawyer in another state?