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?
i filed bk, the home was discharged, and if i understand this correctly, i can walk away. however, i did try to modify mortgage and was turned down supposedly because my housing expense was greater than my monthly income. can i still try for a modification. i would like to stay but i am 4 months behind now. what is the use of paying for something when they turned me down...i may as well rent.....btw....it is boa.
Welcome porsche,
If you haven't reaffirmed the mortgage, there is hardly any chance that the lender will ready to modify your mortgage. Unless you reaffirm your mortgage, you won't be personally liable for the mortgage dues. In that case, the lender will not modify the loan.
If you haven't reaffirmed the mortgage, there is hardly any chance that the lender will ready to modify your mortgage. Unless you reaffirm your mortgage, you won't be personally liable for the mortgage dues. In that case, the lender will not modify the loan.
We submitted for the option of DIL about two months ago. Two months before that we put the house for sale as a short sale and about...3 months before that my husband lost his job. We cannot make the payments. in anyway and we are under the impression that it is better to do the DIL rather than foreclose. First question : Is this true?? or should we just let the bank forclose?
We sent in all the paper work they asked for. We are STILL trying to short sale the house at 30,000 less than we bought it for. And then our mortgage company gave our loan to another bank. Fine, dandy. But we have not heard ANYTHING from this bank! it's been 2 weeks and all we've gotten are automated calls telling us to call, then we do call and we NEVER get a live body! It's driving me insane!
I've heard that this is a regular and that the mortgage companies string you along FOREVER not calling and claiming lost paper work, is this true?
Should we just forclose???
And most importantly, to save on money, we've moved out so we could shut the utilities off, but a good chunk of our belongings are still in the house, will they just take the house back and not tell us and not let us remove our stuff???
PLEASE! we need some answers from someone!
We sent in all the paper work they asked for. We are STILL trying to short sale the house at 30,000 less than we bought it for. And then our mortgage company gave our loan to another bank. Fine, dandy. But we have not heard ANYTHING from this bank! it's been 2 weeks and all we've gotten are automated calls telling us to call, then we do call and we NEVER get a live body! It's driving me insane!
I've heard that this is a regular and that the mortgage companies string you along FOREVER not calling and claiming lost paper work, is this true?
Should we just forclose???
And most importantly, to save on money, we've moved out so we could shut the utilities off, but a good chunk of our belongings are still in the house, will they just take the house back and not tell us and not let us remove our stuff???
PLEASE! we need some answers from someone!
Hi Ica,
It is a better option to apply for a deed in lieu of foreclosure. In case of a normal foreclosure, you'll be liable for paying off the deficient balance resulting from the property sale whereas in case of a deed in lieu of foreclosure, the lender will forgive the deficient balance.
You should immediately contact the lender and apply for it. If the lender approves, then you can surrender the property to the lender and take your personal belongings. The lender won't come after your personal belongings.
It is a better option to apply for a deed in lieu of foreclosure. In case of a normal foreclosure, you'll be liable for paying off the deficient balance resulting from the property sale whereas in case of a deed in lieu of foreclosure, the lender will forgive the deficient balance.
You should immediately contact the lender and apply for it. If the lender approves, then you can surrender the property to the lender and take your personal belongings. The lender won't come after your personal belongings.
I bought a house as investment property. Now property value is down and I am having problem making payments on time. Been late over 30 days several times and late over 10 days all the time. I also havent paid the taxes for a few years and the lender had to buy the 2008 taxes from a invester company that bought the tax certificate. I also dropped the insurance in 2009 and the lender has bought a policy. The lender is asking the loan be paid in full with the taxes and costs to date including all these late penalties or they will forclose CAN THEY JUST DO That even if I get caught up this month on my payment. I cant pay the insurance or the taxes. I didnt ask them to pay them so how can they forclose on that issue anyway?
Hi Gibby,
If it's the lender's policy, then he will be able to foreclose your property if you do not pay off the dues on time. You should negotiate with your lender so that he does not foreclose the property if you catch up on your payments.
Thanks
If it's the lender's policy, then he will be able to foreclose your property if you do not pay off the dues on time. You should negotiate with your lender so that he does not foreclose the property if you catch up on your payments.
Thanks
I have one loan on my home in Las Vegas and I pay PMI on it. I can no longer affored to keep it, my home is under valued by 50,000.00 if I defaulit can the bank still come after me. thank you
Hi Guest,
If you default on your mortgage payments, the lender will foreclose the property and the insurance company will reimburse the deficient balance to the lender. However, there are chances that the insurance company can come after you.
If you default on your mortgage payments, the lender will foreclose the property and the insurance company will reimburse the deficient balance to the lender. However, there are chances that the insurance company can come after you.
hi, i am concerned about my daughters townhome. she has filed for gov. help on the obama refinance help, but has had to apply twice. i am afraid that she just cannot afford her place and may need to do "deed in lieu of foreclosure". we didn't know about this until i come upon this website. she lives in maryland, would this be a good option for her and does maryland have the law that will obsolve her from her debt if she does the "deed in lieu of foreclosure"? thanks
Hi Vicky,
If your daughter wants to save the property, then she will have to apply for a loan modification. This will help her in getting a repayment plan as per her financial situation. However, if she wants to get rid of the property, then she can apply for a deed in lieu of foreclosure. This will not only help her in getting rid of the property but she won't be liable for paying the deficient balance resulting from the property sale.
Thanks
If your daughter wants to save the property, then she will have to apply for a loan modification. This will help her in getting a repayment plan as per her financial situation. However, if she wants to get rid of the property, then she can apply for a deed in lieu of foreclosure. This will not only help her in getting rid of the property but she won't be liable for paying the deficient balance resulting from the property sale.
Thanks
We have filed for bankruptcy in august of this year. Now our bank is offering us a deed and lieu. We feel this won't be a good thing for us. Our credit is already ruined and we don't have the money to pay the bank. What should we do?
Hi Francine!
Welcome to forums!
Whether the lender forecloses the property or goes for a deed in lieu of foreclosure, it will have a negative affect on your credit report. However, you won't be liable for paying any deficient balance resulting from the property sale as your mortgage has been discharged in your bankruptcy filing.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Whether the lender forecloses the property or goes for a deed in lieu of foreclosure, it will have a negative affect on your credit report. However, you won't be liable for paying any deficient balance resulting from the property sale as your mortgage has been discharged in your bankruptcy filing.
Feel free to ask if you've further queries.
Sussane
want to know about the deed and liew how many days do you have after you do a deed and liew to get out of the house
Welcome jessie,
After the deed in lieu of foreclosure sale, the lender will send you an eviction notice. The time period to leave the property will be mentioned in the eviction notice.
After the deed in lieu of foreclosure sale, the lender will send you an eviction notice. The time period to leave the property will be mentioned in the eviction notice.
Hi I am having a hard time deciding what to do. I have an investment property that I am unable to afford now that my tentants are leaving and my husband passed away. The loans are under my husbands name but I have been paying the loans since he passed away. I dont want the properties and wondering if its best if I just walk away or ask the bank for a dee in lieu of foreclouse.