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?
My bank recently started the foreclosure process. I have been contacting them for 8 months to try and modify the loan and haven't succeeded. Now the payments are 4 - 5 months behind. I have asked about deed in lieu and they say that the property has to be listed for 3 months. Is this accurate or is there a way to bypass this? The loan is thru Wells Fargo.
Hi deborah,
You may be able to obtain a lawyer in another state but it would be better if you could obtain the lawyer in the same state where your property is located.
Hi anonymous,
You will have to list the property for 3 months and check out if you can get a buyer for the property. If you don't get any buyer, then the lender can start off with the deed in lieu of foreclosure procedure.
Thanks
You may be able to obtain a lawyer in another state but it would be better if you could obtain the lawyer in the same state where your property is located.
Hi anonymous,
You will have to list the property for 3 months and check out if you can get a buyer for the property. If you don't get any buyer, then the lender can start off with the deed in lieu of foreclosure procedure.
Thanks
Divorced, she has house as PR and responsable for all associated fees stated in DIV FJ. When CS ends, property to be sold, proceeds split. I pay alimony and CS to state. Both our names are on mortgage, in mortgage I can not get my name off, unless RF or sold. neither of us can RF. She has not paid HOA or mortgage since May of 2009. Got served with papers.
Owe $80, market may $110-$120. Want to try to cut loses ASAP. Credit already shot. QCD to her? DIL? if DIL or Foreclosure, can I go after her for losses that possable could have been gained from a sale if not for her actions. Any precidence for this? Case Law?
Owe $80, market may $110-$120. Want to try to cut loses ASAP. Credit already shot. QCD to her? DIL? if DIL or Foreclosure, can I go after her for losses that possable could have been gained from a sale if not for her actions. Any precidence for this? Case Law?
Hi Jim!
Welcome to forums!
Rather than letting the lender foreclose the property, it would be a better option to go for a deed in lieu of foreclosure. The lender will forgive the dues resulting from the property sale. If you wish, you can go after her to recover the losses.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Rather than letting the lender foreclose the property, it would be a better option to go for a deed in lieu of foreclosure. The lender will forgive the dues resulting from the property sale. If you wish, you can go after her to recover the losses.
Feel free to ask if you've further queries.
Sussane
Agree with DIL. Your indicating HOA fees would be included in DIL forgiveness? Also any taxes, interest, attorneys fees for HOA, how can those be directed to her for responsabilaty of satisfaction. Where to look for precidence? Thanks.
Hi Jim,
The HOA fees may not be included when your mortgage balance is forgiven. You will have to pay off the HOA fees in full.
The HOA fees may not be included when your mortgage balance is forgiven. You will have to pay off the HOA fees in full.
Hi Deborah,
I had an 80/20 mortgage, and found myseld falling behind. I applied for modification on both loans. The 80 portion was approved and modified, the 20 portion was denied and written off, and has now since gone to an outside collection agency. I recieved notice from the collection agency by mail last week. Yet..... yesterday I recived a FedEx package form the lender that wrote off the 20 portion, offering me concideration for the HAFA, which invloves short sale or deed-in-lieu. None of which I want. I wanted to save my home, ehich is why I applied for the modification. Still not understanding how the 80,000 portion could be approved, but the 30,000 written off by the second lender in which I owe the lesser ofthe two amounts. Also, how could they now offer me concideration for the HAFA, if they are no longer holding my loan, and wrote it off- sold it to someone else???
I had an 80/20 mortgage, and found myseld falling behind. I applied for modification on both loans. The 80 portion was approved and modified, the 20 portion was denied and written off, and has now since gone to an outside collection agency. I recieved notice from the collection agency by mail last week. Yet..... yesterday I recived a FedEx package form the lender that wrote off the 20 portion, offering me concideration for the HAFA, which invloves short sale or deed-in-lieu. None of which I want. I wanted to save my home, ehich is why I applied for the modification. Still not understanding how the 80,000 portion could be approved, but the 30,000 written off by the second lender in which I owe the lesser ofthe two amounts. Also, how could they now offer me concideration for the HAFA, if they are no longer holding my loan, and wrote it off- sold it to someone else???
I recently moved from a home that mortgage far exceed what the property is going for in that area. In order to secure my home from vandalism I have rented the property for less than half of the mortgage. I am struggling with payments but I am not more than 30 days delinquent. I will retire in two years and will not be able to make up the difference in the mortgage. What options do I have on mortgage property that I am not living in.
Michigan Sufferer
Michigan Sufferer
Can't keep up with payments on an investment property. Bank says "deed in lieu". Valuation will cover the debt. I have insufficient income for modification. Will I have a tax hit? Owner is an LLC, if that matters.
Hi Guest,
It is completely the second lender's discretion whether or not he would modify the loan. Though the first lender has modified the loan, the second lender can charge off the loan to a collection agency that can harass you for payments. You can ask the lender to withdraw the account from collections and negotiate with him so that he gets ready to modify the loan.
Hi Guest,
If you want to get rid of the property, then you can apply for a short sale. This will help you in selling off the property. You would be liable for paying off the balance dues resulting from the property sale. However, you can always negotiate with your lender so that he forgives the dues.
Hi anonymousjoe,
There won't be a tax hit if you go for a deed in lieu of foreclosure. The sale of the property will recover the mortgage balance in full. Thus, the lender won't forgive any dues. So, the question of tax hit does not arise here.
It is completely the second lender's discretion whether or not he would modify the loan. Though the first lender has modified the loan, the second lender can charge off the loan to a collection agency that can harass you for payments. You can ask the lender to withdraw the account from collections and negotiate with him so that he gets ready to modify the loan.
Hi Guest,
If you want to get rid of the property, then you can apply for a short sale. This will help you in selling off the property. You would be liable for paying off the balance dues resulting from the property sale. However, you can always negotiate with your lender so that he forgives the dues.
Hi anonymousjoe,
There won't be a tax hit if you go for a deed in lieu of foreclosure. The sale of the property will recover the mortgage balance in full. Thus, the lender won't forgive any dues. So, the question of tax hit does not arise here.
How long does Deed in Lieu take? From Start to finish.
Can the bank come after you for the blance of the loan when you do a deed of lien foreclosure??
Hi orders,
Both short sale and deed in lieu of foreclosure have their own pros and cons. You can check out the given page for further information: http://www.mortgagefit.com/problems/shortsale-opinion.html
Feel free to ask if you've further queries.
Sussane
Both short sale and deed in lieu of foreclosure have their own pros and cons. You can check out the given page for further information: http://www.mortgagefit.com/problems/shortsale-opinion.html
Feel free to ask if you've further queries.
Sussane
i have been in a short sale/foreclosure process for about 7 months and have been unable to sell the property which has depreciated 50% in 3 years. there is a first and second mortgage on the residence and the first mortgage holder has sent me a deed in lieu of foreclosure agreement which i received today. how does this work if a person has a 1st and 2nd mortgage?
Hi Jessica, I'm on the deed but not on the mortgage, but we do split the mortgage payment and report it on each of our income taxes (50-50), we are thinking of foreclosing, since I file taxes, will this affect my credit score.
And is it true, some states like Georgia, do not deed in lieu of foreclosure?
Judicial versus non judicial bank laws or rules?
And is it true, some states like Georgia, do not deed in lieu of foreclosure?
Judicial versus non judicial bank laws or rules?