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 jj,
It is same with deed in lieu of foreclosure. You can surrender the property and he will sell it off to a buyer and send you an eviction notice. The time period to leave the property will be mentioned in the notice.
It is same with deed in lieu of foreclosure. You can surrender the property and he will sell it off to a buyer and send you an eviction notice. The time period to leave the property will be mentioned in the notice.
I just receive a package offering me the deed in lieu option but we want to keep our house (me and my husband). My mom is able to cure the payments we missed. Is this possible? And How do I do it?
Hi anonymous,
You can contact the lender and let him know that you'll be paying off the back payments in full and avoid a deed in lieu of foreclosure. As far as I know, if you pay off the back mortgage dues in full, the lender will not foreclose the property any more.
Thanks
You can contact the lender and let him know that you'll be paying off the back payments in full and avoid a deed in lieu of foreclosure. As far as I know, if you pay off the back mortgage dues in full, the lender will not foreclose the property any more.
Thanks
Thank you so much for your response...I will contact my lender; hopefully they will take the payments and stop the foreclosure....This is really devastating but with Faith in God everything is possible....Thank you again and God Bless you!!!!
i purchased my home in 2006 using my father in laws information. i was added to the title after the purchase. i have run across some financial troubles and currently late on my mortgage. my father in law set up a deed in lieu with the lender but i still want the home.
Do i have any rights myself? what can i do if i still want to keep the house?
Do i have any rights myself? what can i do if i still want to keep the house?
I just read that if I choose to go the DIL route, it becomes a taxable event and that I have to pay taxes on the difference between what the bank sells the property for and what I owe. SO, say for example, I owe $155,000 and the bank doesn't sell my houses for months (or years!) and then they only get $70,000 for it. That would means I would owe taxes on $85,000!? How can that be less stressful or harmful that foreclosure itself?
Hi mikeypar,
If your name is on the mortgage and if you want to save the property, then you and your father in law should contact the lender and apply for a loan modification. If the lender accepts your request, then you would get affordable rates and terms to pay off the dues.
To Guest,
In case of a deed in lieu of foreclosure, the lender forgives the balance amount which can be considered as an income by the IRS. Thus, it can become taxable. However, depending upon the Mortgage Debt Relief Act, you won't be liable for paying the taxes on the forgiven loan balance.
If your name is on the mortgage and if you want to save the property, then you and your father in law should contact the lender and apply for a loan modification. If the lender accepts your request, then you would get affordable rates and terms to pay off the dues.
To Guest,
In case of a deed in lieu of foreclosure, the lender forgives the balance amount which can be considered as an income by the IRS. Thus, it can become taxable. However, depending upon the Mortgage Debt Relief Act, you won't be liable for paying the taxes on the forgiven loan balance.
Hello t everyone! My husband bought his home in FL in 2004, and it was his primary residence. 7 months later he lost his job and moved to CA for the job. We did not rent the home for a long time paying the mortgage, but decided to rent it to help us to cover the expenses. The rent never covered even the mortgage amount. Last renter trashed the house so badly that it will require $$$$$$ to fix. He also did not pay rent for 3 months. This property was never intended to be a second home or rental.
How long the deed in lieu stays in his credit? Can the lender call to his job telling that he is not paying the mortgage? We only one month behind, but to pay the Fl home we have to take money from my CA home. This is stupid to do. Can we submit a letter of hardship to the lender by ourselves or do we need the realtor? How to find a normal realtor in FL?
How long the deed in lieu stays in his credit? Can the lender call to his job telling that he is not paying the mortgage? We only one month behind, but to pay the Fl home we have to take money from my CA home. This is stupid to do. Can we submit a letter of hardship to the lender by ourselves or do we need the realtor? How to find a normal realtor in FL?
Hi Julia,
A deed in lieu of foreclosure will stay in your credit report for 7 years like any other negative item. It will depend upon the lender whether or not he would call your husband at his work place regarding the mortgage payments. You can contact your lender and submit a letter for hardship and apply for a deed in lieu of foreclosure.
A deed in lieu of foreclosure will stay in your credit report for 7 years like any other negative item. It will depend upon the lender whether or not he would call your husband at his work place regarding the mortgage payments. You can contact your lender and submit a letter for hardship and apply for a deed in lieu of foreclosure.
I own one property and it is a townhouse with an HOA. I filed Ch. 7 bankruptcy in April 2009 and it discharged in August 2009 the property was listed as forfeited. I have not lived in the property since 10/07 because at that time I had lost my job and rented it out to try to offset the cost of the payments in an attempt to retain the property at that time. It has been 1 year now since the bankruptcy has discharged and the lender still has not moved forward in the foreclosure proceedings. I spoke to the lender and they offered the option of a deed in lieu but they would need uptdated income and asset information which has since increased.
Will I have tax consequences due to the fact I did not live in the property even though it was discharged in the bankruptcy?
Can giving them the updated income and assets hurt me?
I am concearned because I received a collection notice that I owe the HOA $4300 since I have not been paying it since bankruptcy proceedings began. I just need to get the ownership of the property out of my name.
Will I have tax consequences due to the fact I did not live in the property even though it was discharged in the bankruptcy?
Can giving them the updated income and assets hurt me?
I am concearned because I received a collection notice that I owe the HOA $4300 since I have not been paying it since bankruptcy proceedings began. I just need to get the ownership of the property out of my name.
Very strange situation. My Brother tricked my dad into signing a quick deed on the house over to him, them had him thrown out of the house. My dad still has the mortgage paymnet or laon in his name. The bank keeps threatening FC but never does. We received aletter from the bank concerning the Deed in Lieu.
Two questions. How did the state allow transfer of ownership to to my brother whnemy father still owed on the house. Number two, is there really a deed for us to sign in Lieu, even though he qucked deeded it 3 years ago.
Two questions. How did the state allow transfer of ownership to to my brother whnemy father still owed on the house. Number two, is there really a deed for us to sign in Lieu, even though he qucked deeded it 3 years ago.
Very strange situation. My Brother tricked my dad into signing a quick deed on the house over to him, them had him thrown out of the house. My dad still has the mortgage paymnet or laon in his name. The bank keeps threatening FC but never does. We received aletter from the bank concerning the Deed in Lieu.
Two questions. How did the state allow transfer of ownership to to my brother whnemy father still owed on the house. Number two, is there really a deed for us to sign in Lieu, even though he qucked deeded it 3 years ago.
Two questions. How did the state allow transfer of ownership to to my brother whnemy father still owed on the house. Number two, is there really a deed for us to sign in Lieu, even though he qucked deeded it 3 years ago.
What exact language (text) should be included in the correspondence to the lender when asking for a deed in lieu of foreclosure?
Is a deed-in-lieu-of possible if I am currently receiving unemployment benefits? Given the housing market (or lack thereof) in MI, selling the house is not an option, nor is abandonment (on principle). Would foreclosure be the wiser choice?
Hi!
Welcome to forums!
To Guest,
You will have to write a hardship letter when you apply for a deed in lieu of foreclosure. Check out the given page to know how to write a hardship letter:
http://www.mortgagefit.com/problems/hardship-letter.html
To James,
You can apply for a deed in lieu of foreclosure if you're receiving unemployment benefits. This option would be better compared to that of a foreclosure.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To Guest,
You will have to write a hardship letter when you apply for a deed in lieu of foreclosure. Check out the given page to know how to write a hardship letter:
http://www.mortgagefit.com/problems/hardship-letter.html
To James,
You can apply for a deed in lieu of foreclosure if you're receiving unemployment benefits. This option would be better compared to that of a foreclosure.
Feel free to ask if you've further queries.
Sussane