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?
Cana mortgage company reject a deed in lieu? Also, how would I proceed with the 2nd mortgage in relation to the deed in lieu? Thank you.
I am retired military. The property I occupied while on active duty is a condo in San Diego county. It has been on the market for 3 years. BofA refused a short sale because my financials show I can easily afford the mortgage payment. I am not longer willing to carry this property. I now live in a home in Las Vegas with the mortgage also with BofA. I am 71 years old and no longer want to continuing paying this mortgage which does eat up a large junk of discretionary income. The property does have a home equity loan also thru BofA. Primary $265,000 scondary $60,000.
Hi lynnerin,
Presently, the property is an investment home. If it would have been your primary residence, then you won't have been liable for paying the second mortgage dues. However, as it is an investment property now, you'll be liable for paying the second mortgage balance to the lender. Moreover both lenders have to agree to a deed in lieu of foreclosure. Unless both of them agree, a deed in lieu of foreclosure won't take place.
To TH,
A mortgage company can reject your request for a deed in lieu of foreclosure. The second mortgage lender has to agree to the request of a deed in lieu of foreclosure. Unless the second lender agrees, the first lender won't do a deed in lieu of foreclosure.
Thanks
Presently, the property is an investment home. If it would have been your primary residence, then you won't have been liable for paying the second mortgage dues. However, as it is an investment property now, you'll be liable for paying the second mortgage balance to the lender. Moreover both lenders have to agree to a deed in lieu of foreclosure. Unless both of them agree, a deed in lieu of foreclosure won't take place.
To TH,
A mortgage company can reject your request for a deed in lieu of foreclosure. The second mortgage lender has to agree to the request of a deed in lieu of foreclosure. Unless the second lender agrees, the first lender won't do a deed in lieu of foreclosure.
Thanks
This is the 1st month that my wife and I will be unable to make a mortgatge payment. I'm out of a job at the end of the month and she will be after the 1st. Cannot afford the house anylonger is a Dead in leu of Forclosure the right thing to do. Tried the Modification loan and applied over a yr ago with no news other than they want us to fax papers again for the 4th time. We are going to move and live with in-laws after we off load our house.
I am upside down in my home by about $40,000. I have lost my job, but found employment in another state. WHat can I do with my home?
Hi Anonymous,
As you want to get rid of the property, you can apply for a deed in lieu of foreclosure with your lender. If the lender is convinced by your financial hardship, then he'll accept your request. However, a deed in lieu of foreclosure will have a negative affect on your credit report and will lower your score by 250 points.
Thanks
As you want to get rid of the property, you can apply for a deed in lieu of foreclosure with your lender. If the lender is convinced by your financial hardship, then he'll accept your request. However, a deed in lieu of foreclosure will have a negative affect on your credit report and will lower your score by 250 points.
Thanks
if lender agrees to DIL are you able to stay in your house after the papers are signed over to the bank? If so how long - if not when would one have to vacate?
If foreclosure process starts to stop the process do you have to pay off the whole loan or just get current on all your payments w/penalties etc?
If foreclosure process starts to stop the process do you have to pay off the whole loan or just get current on all your payments w/penalties etc?
Wells Fargo says I must go for a short sale first before they will consider a deed inlieu. They require the home be listed at least 3 months. My loan was with Wacovia when Wells Fargo bought them out Dec. 2009. I have been trying to get an affordable modified loan. They want up to 38% of my gross income to go towards the mortgage payment with an interest rate of 7.125% . It includes the realestate taxes and insurance. This would take 2 of my weekly checks to cover and is not affordable. The principle amount after they tacked on legal and late fees, is about what the house is worth. Their "drive by appraisal" is $40,000 less than that.
I filled Chapter 7 Dec 2009 for medical bills and charge cards after Wacovia told me I was approved for a modified laon at 5.125% fixed for 30 years. After 2 years and 6 times resubbmitting the same info to them, the short sale department wants it all again. I just want out. Can I get an attorney to do the deed in lieu for me?
I filled Chapter 7 Dec 2009 for medical bills and charge cards after Wacovia told me I was approved for a modified laon at 5.125% fixed for 30 years. After 2 years and 6 times resubbmitting the same info to them, the short sale department wants it all again. I just want out. Can I get an attorney to do the deed in lieu for me?
Hi Bryse,
It will be the lender's discretion whether or not he will let you stay in the property once you surrender it to him. Normally, the lender sends the eviction notice after the property is sold off at an auction. If the lender goes for a foreclosure, he will want to get back the loan in full. If the sale results into a deficient balance, then you'll be liable for paying the balance amount from your pocket.
To Guest,
It is true that before you submit your application for a deed in lieu of foreclosure, the lender will want you to list the property in the market for 3 months. Once 3 months are over, the lender will consider your request. Rather than taking the help of an attorney, it will be better if you could apply for a deed in lieu of foreclosure on your own.
Thanks
It will be the lender's discretion whether or not he will let you stay in the property once you surrender it to him. Normally, the lender sends the eviction notice after the property is sold off at an auction. If the lender goes for a foreclosure, he will want to get back the loan in full. If the sale results into a deficient balance, then you'll be liable for paying the balance amount from your pocket.
To Guest,
It is true that before you submit your application for a deed in lieu of foreclosure, the lender will want you to list the property in the market for 3 months. Once 3 months are over, the lender will consider your request. Rather than taking the help of an attorney, it will be better if you could apply for a deed in lieu of foreclosure on your own.
Thanks
Samantha, I don't know where you get your information, but FICO says that they treat a deed-in-lieu, short sales and foreclosures the same. They all have the SAME impact on one's credit score.
Honestly, I see this misinformation all over the internet. It's in black and white right there on FICO's website. They are treated the same.
If you can't get a mortgage modification I suppose the deed-in-lieu is the easiest thing to do, aside from walking away from the house. But don't do it because you think it has a lesser impact on your credit score.
Honestly, I see this misinformation all over the internet. It's in black and white right there on FICO's website. They are treated the same.
If you can't get a mortgage modification I suppose the deed-in-lieu is the easiest thing to do, aside from walking away from the house. But don't do it because you think it has a lesser impact on your credit score.
I purchased a second house 4 years ago in Fl for investment purposes. I have had a tenant from day 1. Recently they stopped making payments and I cant afford to make the payment. I am 4-5 months behind and the mortgage company will not take a partial payment. (Bank of America). I want to get out of this house as it is underwater. I owe 145K and cant sell it as there are SO many houses for sale. I paid 180 K HELP!!!
Hello Jessica,
I am wondering about a property that was up for auction on August 24, 2010, the Judgement against the house was $939,000. I am not sure what happened at the auction but the owner is back living in the property and I am almost positive the was a Deed in Lieu with the mortgage company. Am I missing something? Especially having gone to auction.l Help!
I am wondering about a property that was up for auction on August 24, 2010, the Judgement against the house was $939,000. I am not sure what happened at the auction but the owner is back living in the property and I am almost positive the was a Deed in Lieu with the mortgage company. Am I missing something? Especially having gone to auction.l Help!
My husband and I agreed to do a deed in lieu of foreclosure in December 2009, everything was ok until today when we received a letter from a debt collector stating that we owe the uncollected balance from the sell of our house. Can they do that? I thought the whole point of a DIL was that the debt was forgiven and we agreed to take a hit on our credit and turn the property back over to the lender.
Any advice?
Thanks
Any advice?
Thanks
Welcome SSullivan,
If the owner had paid the dues in full to the lender and redeemed the property, then he or she can get back the property and stay on it.
To anonymous,
In case of a deed in lieu of foreclosure, the lender forgives the balance amount. You should contact the lender and ask him to forgive the balance amount so that you're not responsible for paying it off.
If the owner had paid the dues in full to the lender and redeemed the property, then he or she can get back the property and stay on it.
To anonymous,
In case of a deed in lieu of foreclosure, the lender forgives the balance amount. You should contact the lender and ask him to forgive the balance amount so that you're not responsible for paying it off.
I have a rental and I am behind on six payments. Wachovia has started foredlosure proceedngs. If I can convince them to take deed in lieu of foreclosure what would be my tax liability? Loan is now $252,000 property is now worth $100,000. Would appreciate comments.