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 Guest,
If the mortgage is not under your name, then you're not personally liable for paying the dues. You can walkaway from the property and let the lender foreclose it. He won't be able to come after you in order to recover the deficient balance from you.
Thanks
If the mortgage is not under your name, then you're not personally liable for paying the dues. You can walkaway from the property and let the lender foreclose it. He won't be able to come after you in order to recover the deficient balance from you.
Thanks
son died owed house note :(
Hi Guest!
Welcome to forums!
If your name is not on the mortgage docs, then you're not responsible for paying off the mortgage dues. You can ask the lender to foreclose the property in order to recover their dues.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If your name is not on the mortgage docs, then you're not responsible for paying off the mortgage dues. You can ask the lender to foreclose the property in order to recover their dues.
Feel free to ask if you've further queries.
Sussane
I am seeking a Deed in lieu.When would I be able to buy another house. :cry:
we have been out of work for some time and can not afford our home anymore. we have realized that the only option is to move to a smaller homer. we do not want to just get up and move, but we just can't afford it. we are considering a deed in lieu. how does this work if we have a primary mortgage company who financed a good portion of the original loan and a second mortgage company carried the rest.
Hi Guest,
Both the first and the second mortgage lender have to agree to your request for a deed in lieu of foreclosure. If the second lender does not agree to it, then you won't be able to sell off the property through a deed in lieu of foreclosure.
Both the first and the second mortgage lender have to agree to your request for a deed in lieu of foreclosure. If the second lender does not agree to it, then you won't be able to sell off the property through a deed in lieu of foreclosure.
I am a business owner who leases a property from an owner that has defaulted on his bank loan. My landlord, the owner had a co-signer on the loan and that person has consequentially, according to him (the co-signer) as having a "Deed in lieu of Foreclosure". Now the co-signer says that I do not have a lease and wants me to sign a new lease with him and collect my deposit from the defaulted original owner. What does the law do to protect me as a tenant from having to sign a new lease for a higher monthly payment and have to make a new deposit? Anything?
Hi WesZ,
You should discuss your situation with your real estate attorney and check out what your rights are in this case. This will help you take the right decision in this case.
You should discuss your situation with your real estate attorney and check out what your rights are in this case. This will help you take the right decision in this case.
What happens if i opt for DIL and the bank sales the house for than i am owing? Say.., my total debt obligation is $120,000.00 to the bank, but the bank is able to sale the house for $130,000.00. What happens to the $10,00.00.
I am behind roughly 4 months now... $5700+ dollars on mortgage. The home is in Tennesee and I just received notice that foreclosure preceedings are starting... I did get a letter saying to ask about DILOF so I was wondering what best option is?
I am recenty unemployeed... and I cannot afford this home... is foreclosure of DIL the best option for me? What comes with this... some kind of fees, etc? Very worried, family of 6 and trying to survive.
my house in the preforeclosure stage now, I want to deed in lieu because I am tied of going back forth with who obviously don't want to deal fairly with me. If you heard the story of my experience with bank then you will see why I say that. Now my house is valued at 80,000 and i owe on the first mortgage 54,856 and I 2,856.00 behind on the mortgage which is included the balance I gave you. I have a second that I've been told that has been charged off and in bankruptcy 2007 discharged I no longer had any responsible for the mortgage but according to the company they could still come after the house so I continue to pay until after losing my job in 2009 I pay some in 2010 but was no longer able to as the months went by. I have a balance of 12,000 with and back payment of 2000.00 which is not included in the balance. Because of the lack of energy to deal with these people at the bank I would like to give the house back to them because it my understand I possible could 3000.00 to 5,000 by doing this would give me enough money to find another place and an opportunity to start over inspite of the that I will be 65 years old in February. Is it possible for to do this and get some money out as the dose have equity and is in good shape.. I have not receive anything in writing about the foreclosure all they do is tell us stuff on the phone.
not being able to qualify for a mortgage is find, however do you think I could get at least 5,000 because the house has equity or will the bank refuse. I really need to that money to relocated to city closer to other family,
Gale McKenzie
[Email address deleted as per forum rules. Thanks.]
Gale McKenzie
[Email address deleted as per forum rules. Thanks.]
Just how do you go about returning the property to the bank and what exactly do you say to them or do you have to get someone to do it for you if so I don't have any money to pay anyone for such services. So other options do I have as for hiring a service provider.