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?
What happens to the Jr. Liens when you do a deed in lieu of foreclosure?
Welcome Ken,
The borrowers remain liable for the junior liens in case of a deed in lieu. The borrower will have to pay off the balance amount of the junior lien to the lender.
The borrowers remain liable for the junior liens in case of a deed in lieu. The borrower will have to pay off the balance amount of the junior lien to the lender.
Greetings,
I am going through a modification with Citimortgage right now and I have been approved apparently for the HAMP back-up modification which lowered my payments about $600 and and down to under 3% interest for 5 yrs.
I was just laid off last week and they are using my income from my prior job even with that I feel like I am throwing away $ b/c if I ever do want out the home is worth more then $30k less then what I owe and I will have to either try a short sale or deed in lieu.
Should I just try to cut my losses now, stop paying and see if they will accept the deed in lieu instead of going through the modification? If I accept the modification will it affect my chances of getting out from under the mortgage later if I want to try for the deed in lieu down the road?
I am going through a modification with Citimortgage right now and I have been approved apparently for the HAMP back-up modification which lowered my payments about $600 and and down to under 3% interest for 5 yrs.
I was just laid off last week and they are using my income from my prior job even with that I feel like I am throwing away $ b/c if I ever do want out the home is worth more then $30k less then what I owe and I will have to either try a short sale or deed in lieu.
Should I just try to cut my losses now, stop paying and see if they will accept the deed in lieu instead of going through the modification? If I accept the modification will it affect my chances of getting out from under the mortgage later if I want to try for the deed in lieu down the road?
Hi Bushwik,
If you feel that you won't be able to make your mortgage payments even with the help of the loan modification plan, you can stop making the payments and apply for a deed in lieu of foreclosure. After going though your financial situation, if the lender is convinced, he will agree to it and you'll be able to get rid of the property.
Thanks
If you feel that you won't be able to make your mortgage payments even with the help of the loan modification plan, you can stop making the payments and apply for a deed in lieu of foreclosure. After going though your financial situation, if the lender is convinced, he will agree to it and you'll be able to get rid of the property.
Thanks
why does it seem that people choose short sales over deed of in leiu?
Hi bev!
Welcome to forums!
A short sale will have a lower negative affect on your credit report compared to a deed in lieu of foreclosure. A short sale will reduce your credit score by 75-100 points whereas a deed in lieu of foreclosure will lower your score by 250 points.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
A short sale will have a lower negative affect on your credit report compared to a deed in lieu of foreclosure. A short sale will reduce your credit score by 75-100 points whereas a deed in lieu of foreclosure will lower your score by 250 points.
Feel free to ask if you've further queries.
Sussane
THE LAWYERS WORKING WITH MY MORTGAGE COMPANY HAVE OFFERED US A DEED IN LIEU OF NOTICE, BUT ARE REQUESTING OVER $6,000 IN FEES ALREADY OCCURED. IS THIS NORMAL, WE DO NOT HAVE THE REQUESTED AMOUNT. WE DID HAVE A SHORT SALE OFFER IN PLACE BUT THE MORTAGE COMPANY REFUSED IT.
Hi Guest,
Your query has been replied to in the given page:
http://www.mortgagefit.com/annoucements/about44510.html#184757
Take a look at it. Hope it helps you.
Your query has been replied to in the given page:
http://www.mortgagefit.com/annoucements/about44510.html#184757
Take a look at it. Hope it helps you.
should i get a real estate attorney to handle this for me or can i do this myself??
What if there is a second motgage on the property through another lender? Also, what about unpaid real estate taxes?
my husband and i have a land contract we can longer afford, we'd like to just walk away from it, can we file for a deed in lieu? do we have to have the seller agree first?
hi slcb,
you should contact your lender yourself and apply for a deed in lieu of foreclosure. you don't need an attorney for doing this. you can negotiate with the lender yourself and get rid of the property.
to mitch,
you'll have to pay off the back taxes in full though your property goes for a deed in lieu of foreclosure. if there is a second mortgage on the property, then the first lender may not agree to sell off the property through a deed in lieu of foreclosure unless the second lender releases his claim. he second lender will in turn come after you for the balance amount resulting from the property sale or he may charge off the dues.
to mrskent,
if you're facing hardship and if you're delinquent on your mortgage payment, then you can apply for a deed in lieu of foreclosure to get rid of the property. if you have a seller, then it will be easier for you to convince the lender for a deed in lieu of foreclosure.
thanks
you should contact your lender yourself and apply for a deed in lieu of foreclosure. you don't need an attorney for doing this. you can negotiate with the lender yourself and get rid of the property.
to mitch,
you'll have to pay off the back taxes in full though your property goes for a deed in lieu of foreclosure. if there is a second mortgage on the property, then the first lender may not agree to sell off the property through a deed in lieu of foreclosure unless the second lender releases his claim. he second lender will in turn come after you for the balance amount resulting from the property sale or he may charge off the dues.
to mrskent,
if you're facing hardship and if you're delinquent on your mortgage payment, then you can apply for a deed in lieu of foreclosure to get rid of the property. if you have a seller, then it will be easier for you to convince the lender for a deed in lieu of foreclosure.
thanks
how can I do a deed in lieu and then be able to purchase a small less expensive home?
Will I have to pay taxes if I do a deed in leiu on a property that was already discharged in a ch 7 bankruptcy? It was my only property but I did rent it out for 2 years when I moved out of it becuase I could no longer afford to pay the mortgage and hoped to keep the property at that time. I need to get the property out of my name ASAP and the lender said they do not know when they will proceed with foreclosure and it's already been empty almost 2 years.
hello! i own a rental property in california that was originally purchased as my primary residence. it is now worth about $440k while i owe $526k on it. i have a tenant, but the market is so weak that i am not covering my expenses. i am short about $700 a month including hoa fees and property taxes. i am interested in doing a deed in lieu, but i have a primary loan of $446k with one bank and an $80k home equity loan from a different bank. how can i get out of the house without having to pay the wells fargo equity loan? thank you very much for your advice!!