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 tinygale!
Welcome to forums!
As you're already in the pre-foreclosure stage, you can apply for a deed in lieu of foreclosure. This will not only help you in getting rid of the property but you won't be liable for paying off the deficient amount resulting from the property sale. However, this will reduce your credit score by 250 points.
However, it will be completely the lender's discretion whether or not he will agree to it.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
As you're already in the pre-foreclosure stage, you can apply for a deed in lieu of foreclosure. This will not only help you in getting rid of the property but you won't be liable for paying off the deficient amount resulting from the property sale. However, this will reduce your credit score by 250 points.
However, it will be completely the lender's discretion whether or not he will agree to it.
Feel free to ask if you've further queries.
Sussane
hello,
we filed for bankrupcy a couple of years ago when our business failed and our mortgage and equity loans were included in that and released. however, we have continued to pay both mortgages voluntarily even though we did not reaffirm.
my husband has now been laid off almost three months and we are having great difficulty keeping up these payments, plus we have been unable to pay our property taxes for 2010.
the mortgage company (wells fargo) sent a letter with deed in lieu as an option they offer.
my question is, how would this affect a second mortgage and the property taxes? would we still be responsible for the equity loan?
thank you
we filed for bankrupcy a couple of years ago when our business failed and our mortgage and equity loans were included in that and released. however, we have continued to pay both mortgages voluntarily even though we did not reaffirm.
my husband has now been laid off almost three months and we are having great difficulty keeping up these payments, plus we have been unable to pay our property taxes for 2010.
the mortgage company (wells fargo) sent a letter with deed in lieu as an option they offer.
my question is, how would this affect a second mortgage and the property taxes? would we still be responsible for the equity loan?
thank you
My house appraised at $290,000. I put it on market in 2009 but no sale. In dec 2009, I took it off market & refinanced and took cash out - $200,000 mortgage. I used cash as entrance fee to a retirement community. In 2010, I put it back on market at $250,000 and rented out house. Still no sale. Would it be wise to use deed in lieu to get out of paying this mortgages? So far I haven't missed a mortgage payment but I have tapped my savings for $14,000 this passed year.
Hi Tricia,
You're not personally liable for any of the mortgages as you did not reaffirm your loan. You can simply surrender the property to the lender and let him go for a deed in lieu of foreclosure to recover as much dues as possible. However, you may have to pay the taxes for 2010.
Welcome DanS,
Unless you're facing severe financial hardship, the lender will not let you go for the option of deed in lieu of foreclosure. Nevertheless, you should contact your lender and apply for it.
You're not personally liable for any of the mortgages as you did not reaffirm your loan. You can simply surrender the property to the lender and let him go for a deed in lieu of foreclosure to recover as much dues as possible. However, you may have to pay the taxes for 2010.
Welcome DanS,
Unless you're facing severe financial hardship, the lender will not let you go for the option of deed in lieu of foreclosure. Nevertheless, you should contact your lender and apply for it.
Can the lender come back down the road to recover what they lost on the house from you if you have your job back
plese tell me if any other owner's assets are vulnerable when home is foreclosed
Hi Angelica,
After a foreclosure, whether or not you've a job, the lender has the rights to come after you in order to recover the deficient balance. However, as you've gone for a deed in lieu of foreclosure, whether or not you've a job, the lender will forgive the deficient balance resulting from the property sale.
To flander,
After a deed in lieu of foreclosure, the lender forgives the deficient balance resulting from the sale. In such a situation, none of the owner's other properties are in jeopardy.
Thanks
After a foreclosure, whether or not you've a job, the lender has the rights to come after you in order to recover the deficient balance. However, as you've gone for a deed in lieu of foreclosure, whether or not you've a job, the lender will forgive the deficient balance resulting from the property sale.
To flander,
After a deed in lieu of foreclosure, the lender forgives the deficient balance resulting from the sale. In such a situation, none of the owner's other properties are in jeopardy.
Thanks
Is it best to get a lawyer involved with filing for a deed in lieu?
moragage paid inful owe two years maintence , would deed in lieu or foreclosure be better for me , live in ireland own the poperty 5 years cannnot sell or rent and now cannnot pay mintence
Hi!
Welcome to forums!
To Jan,
You can negotiate with the lender yourself in order to get a deed in lieu of foreclosure. However, if you feel that you won't be able to convince the lender regarding your situation, then you can take the help of an attorney in this regard.
To John,
If your mortgage is paid in full, then you don't have to go for the option of deed in lieu or foreclosure. You should ask the timeshare company to take back the property. They may help you in getting rid of the property.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To Jan,
You can negotiate with the lender yourself in order to get a deed in lieu of foreclosure. However, if you feel that you won't be able to convince the lender regarding your situation, then you can take the help of an attorney in this regard.
To John,
If your mortgage is paid in full, then you don't have to go for the option of deed in lieu or foreclosure. You should ask the timeshare company to take back the property. They may help you in getting rid of the property.
Feel free to ask if you've further queries.
Sussane
I try all the time to talk to these people and its like they give me the run around. Always same documents, they want me to fax back. They never want to confirm they received the fax,but on my end it says fax sent. Never a straight answer. Comfused and don't know which way to go or who to turn to. Just trying to be straight up with this bank, for help and the right thing to do and all it is a constant hassle. All same papers they want signed and returned, about ready to just give up and start moving. Leaving the house I've tried to save and provide for my wife and two children.
No help, but didn't us as Americans help these banks recover!!!!!!
No help, but didn't us as Americans help these banks recover!!!!!!
We have only been able to pay the lowest payment on our mortgage for years, so the balance has risen every year. The mortgage is set to "balloon" in about a year. When it does, we will not be able to afford the lowest payment, the full payment will be more impossible than it is now. The house is upside down approximately $150,000, between what we owe and the best we can figure is the current market value. It may actually be more than that going by the fact that a house down the street is in short sale and has not sold, and if it does go for the price it is listed at now, well it would just be more hopeless. We also have an equity loan for about $29,000. We can continue to make the minimum payment until it balloons, then will have to stop. When should we start looking into a deed in lieu of foreclosure? What are the first steps?
Hi mactavish,
If you're facing hardship in paying off the mortgage, you can apply for a deed in lieu of foreclosure immediately. If the lender is convinced about your financial hardship, then he will consider your request.
If you're facing hardship in paying off the mortgage, you can apply for a deed in lieu of foreclosure immediately. If the lender is convinced about your financial hardship, then he will consider your request.
Hi adonis,
We are not behind in our payments yet, just paying the "lowest" payment every month. Once the loan balloons we will no longer be able to make the payments, not even the lowest one. Do you have to be behind in your payments before you apply for a deed in lieu of foreclosure? I was thinking that we should keep paying the lowest payment, as we are now, until the time it balloons, then get an attorney, and proceed with applying for the deed in lieu of foreclosure. Of course, over that period of time the mortgage balance will increase every month. Can you explain the tax law that ends in 2012 that might help with preventing be taxed after completing the deed in lieu of foreclosure. That might help to determine when we should start this whole process. Also, a friend of mine said that we should take all the appliances, window coverings, lighting fixtures, etc. out of the house when we move. Can we do that? It would help to have all those items when we find another place to live.
We are not behind in our payments yet, just paying the "lowest" payment every month. Once the loan balloons we will no longer be able to make the payments, not even the lowest one. Do you have to be behind in your payments before you apply for a deed in lieu of foreclosure? I was thinking that we should keep paying the lowest payment, as we are now, until the time it balloons, then get an attorney, and proceed with applying for the deed in lieu of foreclosure. Of course, over that period of time the mortgage balance will increase every month. Can you explain the tax law that ends in 2012 that might help with preventing be taxed after completing the deed in lieu of foreclosure. That might help to determine when we should start this whole process. Also, a friend of mine said that we should take all the appliances, window coverings, lighting fixtures, etc. out of the house when we move. Can we do that? It would help to have all those items when we find another place to live.
***Just found out that the house down the street which was on a short sale is in escrow for $310,000. If our home was to sell for that (our home would have to be sold "as is" because we can't afford to fix it up any further), then we would still owe the bank $210,000 on our mortgage.***
Add this to my above comments.
Need help.
Add this to my above comments.
Need help.