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?
Welcome Deborah,
Unless the property is sold off at an auction, you will be liable for the taxes and maintenance of the property though you've applied for a short sale. Unless the property is sold off, you'll be able to stay in it. You will be able to say no to the loan modification offer if you feel that you won't be able to afford the amount. If you're not comfortable with short sale, you can go with a deed in lieu of foreclosure.
Unless the property is sold off at an auction, you will be liable for the taxes and maintenance of the property though you've applied for a short sale. Unless the property is sold off, you'll be able to stay in it. You will be able to say no to the loan modification offer if you feel that you won't be able to afford the amount. If you're not comfortable with short sale, you can go with a deed in lieu of foreclosure.
i have a 1st & 2nd on my home. I'm unable to make my payments, if i do a deed in lieu, what happens to the 2nd?
Hi pete,
Though you go for a deed in lieu of foreclosure on your home, you'll be liable for paying off the second mortgage in full to the second mortgage lender. The second lender will not forgive his dues.
Thanks
Though you go for a deed in lieu of foreclosure on your home, you'll be liable for paying off the second mortgage in full to the second mortgage lender. The second lender will not forgive his dues.
Thanks
if i do a deed in lieu, how hard would it be for me to buy another home, after i became financial able.
Hi guest,
You will have to wait for 3-4 years in order to get a mortgage to buy a property after a deed in lieu of foreclosure. Meanwhile, you'll also have to improve your credit score in order to get a mortgage.
Thanks
You will have to wait for 3-4 years in order to get a mortgage to buy a property after a deed in lieu of foreclosure. Meanwhile, you'll also have to improve your credit score in order to get a mortgage.
Thanks
I have a daughter who lives in California, they own a loft and also a house.
They are having a hard time trying to support both properties in this economy. The condo is rented out but they are still having to subsidise it for over 12,000 a year which is causing considerable financial strain. They do not think it is right to walk away or forclose on it. They are trying there hardest to make this work. Is there any alternatives that you could suggest either reduce there debt.
They are having a hard time trying to support both properties in this economy. The condo is rented out but they are still having to subsidise it for over 12,000 a year which is causing considerable financial strain. They do not think it is right to walk away or forclose on it. They are trying there hardest to make this work. Is there any alternatives that you could suggest either reduce there debt.
Hi canuck,
As your daughter is facing hardship in paying the mortgages, she should contact her lenders and apply for a loan modification. This will help her in reducing her monthly payments as the lender will give her lower rates to pay off the dues and increase her loan term.
As your daughter is facing hardship in paying the mortgages, she should contact her lenders and apply for a loan modification. This will help her in reducing her monthly payments as the lender will give her lower rates to pay off the dues and increase her loan term.
We put our house up for a short sale. If we don't sell it and want to try to go ahead with a deed in lieu of forclosure, do we have to be living in the house in order to get a tax break or can we go ahead and move out?
Hi guest!
Welcome to forums!
You can surrender the property to the lender and apply for a deed in lieu of foreclosure. If it's your primary property, then you will be able to take advantage of Mortgage Debt Relief Act though you don't stay in the property now.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You can surrender the property to the lender and apply for a deed in lieu of foreclosure. If it's your primary property, then you will be able to take advantage of Mortgage Debt Relief Act though you don't stay in the property now.
Feel free to ask if you've further queries.
Sussane
Will a lender accept a deed in lieu for an investment property that is vacant and worth less than the mortgage balance? Even if the owner has the ability to make the payments but wants to avoid the loss?
Mark in NC
Mark in NC
Will a lender accept a deed in lieu for an investment property that is vacant and worth less than the mortgage balance? Even if the owner has the ability to make the payments but wants to avoid the loss?
Mark in NC
Mark in NC
Hi, I have to move out of state due to my husband getting another job, and my home has been for sale for 4 months now, and no hits. I am not behind and do not have any liens on the propety. We cannot afford the mortgage plus rent at our new place, so I'm wondering if a deed in lieu is right for me?
Hi sumsum,
A deed in lieu will definitely help you in selling off your property. However, it will have a severe negative affect on your credit report. It will lower your scores by 250 points. Moreover, unless you're facing hardship, the lender will not be ready to sell off your property through a deed in lieu of foreclosure.
A deed in lieu will definitely help you in selling off your property. However, it will have a severe negative affect on your credit report. It will lower your scores by 250 points. Moreover, unless you're facing hardship, the lender will not be ready to sell off your property through a deed in lieu of foreclosure.
Is it best to speak directly to the lender to begin this process or a third party.
Also, once you begin the process -- hopefully for a non-recourse outcome -- do you have to continue to make the mortgage payments?
Also, once you begin the process -- hopefully for a non-recourse outcome -- do you have to continue to make the mortgage payments?
Hi Guest!
Welcome to forums!
If you want to sell off your property through a deed in lieu of foreclosure, then you should directly speak to the lender. Your deed in lieu of foreclosure will be accepted only if you are delinquent on your mortgage payments. Thus, you won't have to make loan payments if you apply for a deed in lieu of foreclosure.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If you want to sell off your property through a deed in lieu of foreclosure, then you should directly speak to the lender. Your deed in lieu of foreclosure will be accepted only if you are delinquent on your mortgage payments. Thus, you won't have to make loan payments if you apply for a deed in lieu of foreclosure.
Feel free to ask if you've further queries.
Sussane