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 Roberts,
In case of a deed in lieu of foreclosure, the deficient balance is forgiven by the lender. As the Mortgage Debt Relief Act is still in vogue, you won't have to pay taxes for the forgiven debt.
Thanks
In case of a deed in lieu of foreclosure, the deficient balance is forgiven by the lender. As the Mortgage Debt Relief Act is still in vogue, you won't have to pay taxes for the forgiven debt.
Thanks
i have a second mortgage and i am unable to pay either loan can i still ask for a deed in lieu?
Hi anony!
Welcome to forums!
You can ask for a deed in lieu of foreclosure. However, if your second lender does not agree to it, then the first lender will not consider your request.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You can ask for a deed in lieu of foreclosure. However, if your second lender does not agree to it, then the first lender will not consider your request.
Feel free to ask if you've further queries.
Sussane
My husband has had ZERO income since Dec 2008. Waiting for a disability hearing. Our home has been listed for short sale for 14 months now, with listing price only $44,000.00 when balance owed to Mort co is $83,000. Fair market value is $50,000. We are being reviewed for Deed In Lieu, we are already moved out of the home, it was left empty & perfectly CLEAN. Would a Deed In Lieu be our best way to go....forclosure papers have already been filed with the Court for Final Judgment. Thanks for any help. And P.S.....are they likely to come after us for the difference??
Hi Terri,
In my opinion, a deed in lieu of foreclosure is a good option to get rid of the property. You should contact your lender and apply for it. You won't be liable for paying the balance amount resulting from the sale of the property.
In my opinion, a deed in lieu of foreclosure is a good option to get rid of the property. You should contact your lender and apply for it. You won't be liable for paying the balance amount resulting from the sale of the property.
If I decide to do a deed in leiu, how long would the other party have to stay on the property?
Which is better for my credit and future, short sale or deed in lieu?
Hi Paula,
After you sell off the property through a deed in lieu of foreclosure, you can give an eviction notice to the owners of the property and mention a stipulated time period to leave the property. It will be your discretion as to how much time period you'll allow them before they leave the property.
To Jeannie,
A short sale is a better option than deed in lieu of foreclosure in terms of your credit and future. A short sale will lower your credit score by 75-100 points where as a deed in lieu of foreclosure will lower your scores by 250 points.
Thanks
After you sell off the property through a deed in lieu of foreclosure, you can give an eviction notice to the owners of the property and mention a stipulated time period to leave the property. It will be your discretion as to how much time period you'll allow them before they leave the property.
To Jeannie,
A short sale is a better option than deed in lieu of foreclosure in terms of your credit and future. A short sale will lower your credit score by 75-100 points where as a deed in lieu of foreclosure will lower your scores by 250 points.
Thanks
i have an investment property with a first and second mortgage i owe more than its worth. what are my options its not rented and im unable to sell
Hi Tom,
You can sell off the property through a deed in lieu of foreclosure but as it is your investment property, you'll be liable for paying off the deficient balance resulting from the property sale. However, you should remember that a deed in lieu of foreclosure will lower your score by 250 points.
You can sell off the property through a deed in lieu of foreclosure but as it is your investment property, you'll be liable for paying off the deficient balance resulting from the property sale. However, you should remember that a deed in lieu of foreclosure will lower your score by 250 points.
We purchased land to build our retirement home on, and then our family status changed and we are now raising 2 children. We decided to hold on to the property as an investment, but then the economy declined. The land company we purchased from went bankrupt and now similar parcels of the land that we purchased for $56,000 are now selling for $10,000. I have been in contact with the bank and just received paperwork on Deed-in-Lieu and what we need to do to participate. This is land we no longer want, and haven't paid the last mortgage payment or taxes because we were withdrawing money from and IRA to make due, Is the Deed-in-Lieu something we want to do?
I am currently working with my lender to do a short sale on my property. The issue is, the home has 0 equity, and more than 50% of the community was built with Chinese Drywall. Due to this, homes that were originally purchased for $270,000 or higher is now being sold for $80,000 sometimes less.
My lender is willing to take $80,000 for the home, however, the lender is saying that the PMI company will not approve the short sale unless I come up with $5,000 to be paid to the PMI company. This really makes no sense to me, can you shead some light on this?
My lender is willing to take $80,000 for the home, however, the lender is saying that the PMI company will not approve the short sale unless I come up with $5,000 to be paid to the PMI company. This really makes no sense to me, can you shead some light on this?
i got an installment loan against the value of my mobile home. i filed chapter 7 bankruptcy. the judge did not reaffirm the loan. if i want to walk do i still have to do a deed in lieu even though the debt was discharged?
Hi Namwen,
The lender will recover rest of his dues from the PMI Company. However, the PMI Company may ask you to pay a stipulated sum of money. Unless you pay that amount to them, they won't agree to a short sale.
To dragongrl,
If you walk away from the property, the lender will foreclose it in order to recover as much dues as possible. However, as far as the deficient balance is concerned, the lender won't be able to come after you for it as the debt has been discharged in your bankruptcy filing.
Thanks
The lender will recover rest of his dues from the PMI Company. However, the PMI Company may ask you to pay a stipulated sum of money. Unless you pay that amount to them, they won't agree to a short sale.
To dragongrl,
If you walk away from the property, the lender will foreclose it in order to recover as much dues as possible. However, as far as the deficient balance is concerned, the lender won't be able to come after you for it as the debt has been discharged in your bankruptcy filing.
Thanks
We file C-7 and have recieved our release. Our lawyer gave us a company to use to help with the house. My husband is on disablity and is unable to work. The company we are using said that Wachovia will reduce our payment to 30yr 2%, put inclued late fees and payments making it payments over $3000.00 plus Tax & Ins. Which we can not afford. I am trying to find out if we go short sale who is responsible for tax and other property cost until the house sells and how long can we stay in the home under this ageement? Also deed in lieu how long can we remain in the home, what is the lenght of time this takes. Our loan amount $760,000, we pay our own tax & ins. Not paper work as been sent to the bank only over the phone interview. If we move forward with the loan modificaion and the final amount is not somethings we can handle can we say no? Do we need to go with the short sale or can we just do Deed in lieu. My husband is not well and I am not sure if he will be able to go back to his line of work. On going with this for couple years have done everything we caould financally to keep the house. Which as drain our asset. :?: