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 Charlie,
Though you have two loans, you can go for a deed in lieu of foreclosure with your first lender. In that case, the first lender will forgive the balance dues resulting from the property sale. However, the second mortgage lender will not forgive the dues. He may come after you for the balance amount resulting from the sale of the property.
Hi Joella,
If you're not on the mortgage, then the foreclosure will not be mentioned in your credit report and it won't lower your credit scores. I haven't heard of any such rule which says that deed in lieu of foreclosure is not available in states like Georgia.
Thanks
Though you have two loans, you can go for a deed in lieu of foreclosure with your first lender. In that case, the first lender will forgive the balance dues resulting from the property sale. However, the second mortgage lender will not forgive the dues. He may come after you for the balance amount resulting from the sale of the property.
Hi Joella,
If you're not on the mortgage, then the foreclosure will not be mentioned in your credit report and it won't lower your credit scores. I haven't heard of any such rule which says that deed in lieu of foreclosure is not available in states like Georgia.
Thanks
Jessica,
I recently had a child and need more space. I currently have a 2 bedroom, 2 and half bath townhome, with a garage. I know that I could qualify for another home if I could get out of my current one. But I know that I could not sell it for what I paid. Can a deed in lieu of foreclosure help me achieve this?
TSB
I recently had a child and need more space. I currently have a 2 bedroom, 2 and half bath townhome, with a garage. I know that I could qualify for another home if I could get out of my current one. But I know that I could not sell it for what I paid. Can a deed in lieu of foreclosure help me achieve this?
TSB
Welcome tsbga,
A deed in lieu of foreclosure will help you in getting rid of the property and you won't be liable for paying the deficient balance. It will be forgiven by the lender. But it'll reduce your credit score by 250 points and you won't be able to get a mortgage within the next 3-4 years.
A deed in lieu of foreclosure will help you in getting rid of the property and you won't be liable for paying the deficient balance. It will be forgiven by the lender. But it'll reduce your credit score by 250 points and you won't be able to get a mortgage within the next 3-4 years.
Hi tsbga,
A deed in lieu is where you hand over property to the lender who them sells it off to retrieve the money he owes. It depends on the market as to whether the lender will be able to sell your home at the price you're looking for. Moreover, you don't get anything from the sale proceeds. However, unlike a short sale, you don't need to pay any deficiency balance (outstanding mortgage debt - home sale price) after a deed in lieu (DIL). That's because a DIL waives the lender's right to collect the deficiency balance from a borrower.
Since you're looking for another home, I'd suggest that you do it only after you repair your credit score that's likely to go down with a deed in lieu. I understand you need space but there's less chance of getting a mortgage at better rates and terms unless you approach a credit union or your State Housing Authority.
What I shall suggest is that you avoid a deed in lieu and negotiate an alternative repayment plan with the lender. By the way, did you have a talk with the lender? Are you comfortable paying on a mortgage with modified terms and conditions or negotiating an alternative repayment plan?
A deed in lieu is where you hand over property to the lender who them sells it off to retrieve the money he owes. It depends on the market as to whether the lender will be able to sell your home at the price you're looking for. Moreover, you don't get anything from the sale proceeds. However, unlike a short sale, you don't need to pay any deficiency balance (outstanding mortgage debt - home sale price) after a deed in lieu (DIL). That's because a DIL waives the lender's right to collect the deficiency balance from a borrower.
Since you're looking for another home, I'd suggest that you do it only after you repair your credit score that's likely to go down with a deed in lieu. I understand you need space but there's less chance of getting a mortgage at better rates and terms unless you approach a credit union or your State Housing Authority.
What I shall suggest is that you avoid a deed in lieu and negotiate an alternative repayment plan with the lender. By the way, did you have a talk with the lender? Are you comfortable paying on a mortgage with modified terms and conditions or negotiating an alternative repayment plan?
may i do a deed in lieu on a rental property that i have been trying to sell for 4 years? i presently have it listed for $25,000 below the tax value and i am going to try lease to own. if that doesn't work, i would like to try the deed in lieu. i would lose $50,000 but it may be the best way, as i am having a hard time making payments.
Hi merniebelle!
Welcome to forums!
You will be able to go for a deed in lieu of foreclosure though it's your rental property. However, in case of a deed in lieu of foreclosure on a rental property, the lender will not forgive the balance dues resulting from the sale.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You will be able to go for a deed in lieu of foreclosure though it's your rental property. However, in case of a deed in lieu of foreclosure on a rental property, the lender will not forgive the balance dues resulting from the sale.
Feel free to ask if you've further queries.
Sussane
In the proces of a short sale which has not produced any positive results. 1st and 2nd mortgage on the house ($117,000/$72,000). Unable to make payments and home repairs on pension. 1st mortgage holder recently forwarded a Deed In Lieu application. I emailed info to my attorney via his secretary. Her response was that I would sign a Deed In Lieu in the short sale (info per the attorney). This contradicts all I've read in this forum. Am I missing something or is maybe the secretary relaying unreliable info. Also, all communication is through the secretary. Please advise.
I purchase my property in 2006 1.25 acres with a singlewide that need it a lots of work but I had a dream of building my home, my business and retire there, everything look good, I had good savings, retirement funds and a promising business, I had no doubt that I could make it, as soon as I moved in, I start my house plans, I even applied and obtain from the City a construction permit, and start building a pool, everything with my personal savings, then I applied for a construction loan to different banks this include your institution, but every bank turned me down, I pursued this for over two years, in the process I used my savings and retirement funds, since I realize I could no longer make it. I had no choice but to move to a different location, for the next two years I tried my best to sell the property with no luck, and in the process I used the rest of my saving and income to maintain my mortgage payment until I could not do it anymore, and I start defaulting. Then I start a modification process thinking that it would be a temporary solution until I could resolve this matter.
Anyway last December somebody told me a couple need it a place to rent, since I had no choice I agree to do it, at first they were very cooperative, they even mention that they would take care of any fixing and that eventually they would like to purchase the property that their fico score was low but they would be working on that and I believed them, so I went ahead and sign a rental contract, they requested for 24 months, so I thought it would be good, this would give them time to improve their credit and even when the rent amount did not cover the entire mortgage payment it would be a lot less what I had to pay, I cover the property insurance and property taxes at this time are current.
But little as I knew this people start falling in their rent payments and to make matters worse start being aggressive and intimidating, using any little excuse to treat to suit me for not doing certain things to the property, (they way it looks they are con artist), now Im in a situation when they dont want to pay the rent anymore, I cant afford the mortgage anymore and I cant also afford any legal action against this people, so for this reason and with heavy heart I would like to return the property back , to prevent foreclosure I heard about DEED IN LIEU. But I dont know the process
Anyway last December somebody told me a couple need it a place to rent, since I had no choice I agree to do it, at first they were very cooperative, they even mention that they would take care of any fixing and that eventually they would like to purchase the property that their fico score was low but they would be working on that and I believed them, so I went ahead and sign a rental contract, they requested for 24 months, so I thought it would be good, this would give them time to improve their credit and even when the rent amount did not cover the entire mortgage payment it would be a lot less what I had to pay, I cover the property insurance and property taxes at this time are current.
But little as I knew this people start falling in their rent payments and to make matters worse start being aggressive and intimidating, using any little excuse to treat to suit me for not doing certain things to the property, (they way it looks they are con artist), now Im in a situation when they dont want to pay the rent anymore, I cant afford the mortgage anymore and I cant also afford any legal action against this people, so for this reason and with heavy heart I would like to return the property back , to prevent foreclosure I heard about DEED IN LIEU. But I dont know the process
hi chas,
you can sign a deed in lieu of foreclosure in order to get rid of the property. however, though your 1st mortgage lender will not come after you for the unpaid balance resulting from the sale, your second mortgage lender will be able to come after you for the balance amount.
to carmen,
you can go for a deed in lieu of foreclosure in order to get rid of the property. you will have to contact the lender and apply for the same. to know more about deed in lieu of foreclosure, check out the given page:
http://www.mortgagefit.com/deed-lieu.html
thanks
you can sign a deed in lieu of foreclosure in order to get rid of the property. however, though your 1st mortgage lender will not come after you for the unpaid balance resulting from the sale, your second mortgage lender will be able to come after you for the balance amount.
to carmen,
you can go for a deed in lieu of foreclosure in order to get rid of the property. you will have to contact the lender and apply for the same. to know more about deed in lieu of foreclosure, check out the given page:
http://www.mortgagefit.com/deed-lieu.html
thanks
In Army and about to go to korea and will be gone for three years. is this a good ideal for me. The deed in lieu?
Hi cedric,
If you want to get rid of the property, then you can go for a deed in lieu of foreclosure. You should contact the lender and apply for the same. But unless you're delinquent on your mortgage payments, the lender won't accept your request. However, it will reduce your credit score by 250 points.
If you want to get rid of the property, then you can go for a deed in lieu of foreclosure. You should contact the lender and apply for the same. But unless you're delinquent on your mortgage payments, the lender won't accept your request. However, it will reduce your credit score by 250 points.
If I was renting a property and found out the home had Chinese Drywall, our belongings are still in the home and the owners refuse to give us our money back. They informed us that they have started the deed in lieu of foreclosure process, how long does it usually take before the bank locks the house and we are no longer able to move them.
how long do you have before you have to get out of the property?
Hi jj!
Welcome to forums!
After a foreclosure sale, the lender will give you 3 days time to move out of the property. He will send you an eviction notice regarding the same. You'll have to move out of the property within that given time period.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
After a foreclosure sale, the lender will give you 3 days time to move out of the property. He will send you an eviction notice regarding the same. You'll have to move out of the property within that given time period.
Feel free to ask if you've further queries.
Sussane
but how about the deed in lieu how long before you have to get out of the house for that?