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?
Do you have to be behind in mortgage paymts before the bank will decide if this is an option- or should you be in good standing?
Hi fhjfpsmm,
The lender won't come after your other properties if you go for a deed in lieu of foreclosure as the deficient balance will be forgiven by the lender.
Hi Guest,
Unless you're delinquent on your mortgage payments, the lender may not consider your request for a deed in lieu of foreclosure.
Thanks
The lender won't come after your other properties if you go for a deed in lieu of foreclosure as the deficient balance will be forgiven by the lender.
Hi Guest,
Unless you're delinquent on your mortgage payments, the lender may not consider your request for a deed in lieu of foreclosure.
Thanks
Hi, I have been trying to do a deed in lieu for 5 months now. This is the second try as that the paper work was mess up on the frist try. I thought everything was going smoothly despite more and more paper work that the mortgage says they need filled out. Now for the past two and a half months I have been told that everything was good and we were waiting for the lawyer to send me the paper work to close. Yesterday I get another letter in the mail stating that I am again missing paper work and I have till the end of the month to straighten out the paper work issue or my house goes up for sale. What are my rights in this deal? Are they stalling so I lose everything? How long should this process take?
Thanks, Kevin
Thanks, Kevin
Hi Kevin,
May be you have missed out on some papers. I will suggest you to contact your lender and provide him with the required papers and request him to go ahead with the deed in lieu of foreclosure asap.
May be you have missed out on some papers. I will suggest you to contact your lender and provide him with the required papers and request him to go ahead with the deed in lieu of foreclosure asap.
We have a debtor interested in doing a deed in lieu of foreclosure however he dropped the keys off at the escrow company and asked that they relay a message to us (the lender): he stated "let them know there's a tenant they'll need to evict and to watch out as he's a crook he's already taken several structural items from the property". Why would we want to go forward with the DIL as opposed to a full fledged foreclosure?
Hi Patty!
Welcome to forums!
Your query has been replied to in the given page:
http://www.mortgagefit.com/propertytransfer/about49110.html
Take a look at it. Hope it helps you.
Sussane
Welcome to forums!
Your query has been replied to in the given page:
http://www.mortgagefit.com/propertytransfer/about49110.html
Take a look at it. Hope it helps you.
Sussane
I had a loan with M & T bank for my mobile home. The loan defaulted. Honestly, I don't want the mobile home anymore but am trying to figure out how to get rid of it with the least amount of damage to my credit. I live in PA
Hi sallysuperstar,
You can contact your lender and apply for a deed in lieu of foreclosure in order to get rid of the property. However, if you go for this option, then your credit score will get reduced by 250 points.
You can contact your lender and apply for a deed in lieu of foreclosure in order to get rid of the property. However, if you go for this option, then your credit score will get reduced by 250 points.
I own a condo in GA. I have tried everything to get rid of the property, I have the condo listed with a realtor, tried short sale, even just thought about walking away from the property. My question is: what are the repercussions of a Deed in Leu? What will happen afterwards? What am I responsible for?
Hi stuckinsmyrna!
Welcome to forums!
You can apply for a deed in lieu of foreclosure in order to get rid of the property. A deed in lieu of foreclosure will lower your credit score by 250 points and will remain on your credit report for the next 7 years. You won't be able to get a new mortgage for the next 3-4 years. However, after the deed in lieu of foreclosure, you won't be liable for paying off the deficient balance resulting from the property sale.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You can apply for a deed in lieu of foreclosure in order to get rid of the property. A deed in lieu of foreclosure will lower your credit score by 250 points and will remain on your credit report for the next 7 years. You won't be able to get a new mortgage for the next 3-4 years. However, after the deed in lieu of foreclosure, you won't be liable for paying off the deficient balance resulting from the property sale.
Feel free to ask if you've further queries.
Sussane
We are talking to our lender about a deed in lieu paid in full. We have only a first loan. We have credit score in 800s now. How will this affect our ability to obtain another loan later if we do this? We are current at this time. If it does seriously affect our credit how long will it be before we can borrow again? How do lenders look at deed in lieu vs foreclosure and short sale when applying for another loan later? I understand that many lenders will not loan if you have had a foreclosure in your history. Is it the same with deed in lieu paid in full and short sale? California is the state.
Hi arra,
A deed in lieu of foreclosure will reduce your credit score by 250 points and you won't be able to get a mortgage for the next 3-4 years. However, you won't be liable for paying the deficient balance. A foreclosure will also reduce your score by 250 points but you'll be liable for paying off the deficient balance. A short sale, on the other hand will reduce your score by 80-100 points and you'll be responsible for the deficient balance. However, as you live in the state of California, lenders won't be able to come after you for the deficient balance.
Thanks
A deed in lieu of foreclosure will reduce your credit score by 250 points and you won't be able to get a mortgage for the next 3-4 years. However, you won't be liable for paying the deficient balance. A foreclosure will also reduce your score by 250 points but you'll be liable for paying off the deficient balance. A short sale, on the other hand will reduce your score by 80-100 points and you'll be responsible for the deficient balance. However, as you live in the state of California, lenders won't be able to come after you for the deficient balance.
Thanks
Does DIL effect the Title when investor sells to subsequent buyer. As a resut of DIL, Does 2nd mortgage wipe out because of Operation of law and become an unsecured debt?
welcome picasobilities,
when the property is sold off at the auction, the title will be transferred to the new buyer. the previous owner of the property will be liable for paying off the second mortgage dues in full.
when the property is sold off at the auction, the title will be transferred to the new buyer. the previous owner of the property will be liable for paying off the second mortgage dues in full.
i own a condo in orlando and have negotiated with the bank to do a Deed in lieu of foreclosure. The condo is under a corporations name and currently does not appear on my credit. I am sure in the small print I am guarantor on the loan in some way but I used a fed ID # when obtaining the loan and not my social security #.
Can you tell me what the likelyhood of this impacting my credit?
Can you tell me what the likelyhood of this impacting my credit?