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 mactavish!
Welcome to forums!
A lender will consider your deed in lieu of foreclosure request when you're delinquent on your mortgage payments. Once you're delinquent on your mortgage payments, it will be easier for you to convince the lender about your financial hardship.
Which tax law are you speaking of? Are you speaking about "Mortgage Debt Relief Act"?
Sussane
Welcome to forums!
A lender will consider your deed in lieu of foreclosure request when you're delinquent on your mortgage payments. Once you're delinquent on your mortgage payments, it will be easier for you to convince the lender about your financial hardship.
Which tax law are you speaking of? Are you speaking about "Mortgage Debt Relief Act"?
Sussane
Hi Sussane,
Yes. When you file for a deed in lieu of foreclosure, will the mortgage company just take the house from you, or do they make you put it up for sale to see if it will sell? As I mentioned a house on our street was on a short sale, and currently is in escrow for $310,000. I don't see much hope that if our house was to go on the market, that we would be able to get more than that. If that was to happen we would still owe the mortgage company $210,000. And that amount will keep going up each month we pay the minimum payment (which is all we can do), until the loan balloons, and we then can't make the minimum payment anymore. Will the Mortgage Debt Relief Act be of any help to us, and what is the deadline to make use of it? I think our loan balloons in about a year, but I will be calling the mortgage company about that. We just want to hand over the keys and walk away.
Yes. When you file for a deed in lieu of foreclosure, will the mortgage company just take the house from you, or do they make you put it up for sale to see if it will sell? As I mentioned a house on our street was on a short sale, and currently is in escrow for $310,000. I don't see much hope that if our house was to go on the market, that we would be able to get more than that. If that was to happen we would still owe the mortgage company $210,000. And that amount will keep going up each month we pay the minimum payment (which is all we can do), until the loan balloons, and we then can't make the minimum payment anymore. Will the Mortgage Debt Relief Act be of any help to us, and what is the deadline to make use of it? I think our loan balloons in about a year, but I will be calling the mortgage company about that. We just want to hand over the keys and walk away.
Welcome mactavish,
The Mortgage Debt Relief Act comes into play if the lender has forgiven the deficient balance resulting from the property sale in a foreclosure or a deed in lieu of foreclosure auction.
The Mortgage Debt Relief Act comes into play if the lender has forgiven the deficient balance resulting from the property sale in a foreclosure or a deed in lieu of foreclosure auction.
We really want to keep our house, if we do the Deed in Lieu of Foreclosure, I am not sure I understand this procedure.
Hi Guest,
In case of a deed in lieu of foreclosure, you will lose the house. The lender will sell off the property in order to recover as much dues as possible. If you want to save the property, then you'll have to convince the lender somehow to modify the loan.
In case of a deed in lieu of foreclosure, you will lose the house. The lender will sell off the property in order to recover as much dues as possible. If you want to save the property, then you'll have to convince the lender somehow to modify the loan.
Hello.
I am financially unable to make my mortgage payments unless I receive my military housing allowance due to an ongoing government debt dispute which has put me and my family in financial hardship.
I expect to be transferred from Arizona to Florida within the next few months. I cannot attempt a short sale due to the fact that I would have no way to finance a move or to afford a temporary place to live in until I am transferred either.
Question: With a VA home loan, would I be eligible to negotiate a deed in lieu of option with my mortgage company?
When I arrive in Florida I plan to rent instead of buying however, I do not want to damage my credit rating and my standing with the VA.
Any assistance would be appreciated.
Thanks.
Dave
I am financially unable to make my mortgage payments unless I receive my military housing allowance due to an ongoing government debt dispute which has put me and my family in financial hardship.
I expect to be transferred from Arizona to Florida within the next few months. I cannot attempt a short sale due to the fact that I would have no way to finance a move or to afford a temporary place to live in until I am transferred either.
Question: With a VA home loan, would I be eligible to negotiate a deed in lieu of option with my mortgage company?
When I arrive in Florida I plan to rent instead of buying however, I do not want to damage my credit rating and my standing with the VA.
Any assistance would be appreciated.
Thanks.
Dave
when should you do a short sale instead of deed in lieu?
i have just acquired power of attorney of my sister. she is about to do a deed in lieu in CA and has no paperwork what so ever of doing a reversed mortgage. i must return to Maine and handle all of this from there. i have had contact with the bank holding the mortgage but don't know where to go from here. what do i ask of the bank to get started with whatever i can get before leaving.
Welcome Dave,
You will be able to apply for a deed in lieu of foreclosure, though you have a VA loan.
Hi Alice,
If you have the ability to pay off the deficient balance, then you can go for the option of the short sale.
To norma,
You should write a hardship letter in order to apply for a deed in lieu. The lender will check your financial situation based on the letter and let you know whether or not he will consider your request.
Thanks
You will be able to apply for a deed in lieu of foreclosure, though you have a VA loan.
Hi Alice,
If you have the ability to pay off the deficient balance, then you can go for the option of the short sale.
To norma,
You should write a hardship letter in order to apply for a deed in lieu. The lender will check your financial situation based on the letter and let you know whether or not he will consider your request.
Thanks
we have a home that we rented that is with the same lender as the house we live in. The people that were renting our other house stopped paying the payment refused to get out and when they finally did, they destroyed it. Due to all our money being gone and now not being able to rent the house out to pay the mortgage we are looking at losing the house. Will we also lose the house we are in if it is with the same lender?And can we do the deed in lieu with thw house that was rented put?
Hi dh,
You can apply for a deed in lieu of foreclosure for the rental property and get rid of it. The lender will forgive the deficient balance and thus won't come after your other property in order to recover the dues.
You can apply for a deed in lieu of foreclosure for the rental property and get rid of it. The lender will forgive the deficient balance and thus won't come after your other property in order to recover the dues.
In Virginia......once a deed in lieu is recorded.....how long do you have to stay in the property. Legally when can the bank kick you out so to speak.
Is 45 days or 30 business days unreasonable???
Is 45 days or 30 business days unreasonable???
Hello I wanted to know how junior liens are affected by dee in lieu vs. foreclosure. My main goal is to wipe out the junior liens. I have got mixed answers on this. I heard the junior lien holders can come after me regardless of deed in lieu or a foreclosure. Junior liens are with different lenders One is a private loan and the other is a bank. Thanks
Hi!
Welcome to forums!
To orfbound,
After the property is sold off at the auction, you'll receive an eviction notice from the lender. The notice will mention the time period within which you will have to leave the property.
To Guest,
Deed in lieu of foreclosure will help you in getting rid of the mortgage. However, you will have to pay off the junior liens in full.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To orfbound,
After the property is sold off at the auction, you'll receive an eviction notice from the lender. The notice will mention the time period within which you will have to leave the property.
To Guest,
Deed in lieu of foreclosure will help you in getting rid of the mortgage. However, you will have to pay off the junior liens in full.
Feel free to ask if you've further queries.
Sussane
When deed in leiu is granted what happens to other assets?