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.
Posted on: 10th Apr, 2004 03:58 am
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?
Almost the same question as Mikey77's.
My house was built under a corporation name with me and my partner as guarantors. We didn't finish the house due to the various reasons and now bank wants to foreclose on it.
The house is in a negative equity now as the market collapse affected its price range the most.
Foreclosure or DIL, I'd like to see if a corporation protects my personal credit after this house is off my hands.
My house was built under a corporation name with me and my partner as guarantors. We didn't finish the house due to the various reasons and now bank wants to foreclose on it.
The house is in a negative equity now as the market collapse affected its price range the most.
Foreclosure or DIL, I'd like to see if a corporation protects my personal credit after this house is off my hands.
Hi!
Welcome to forums!
To Mickey,
If your name is mentioned on the mortgage deed as one of the borrowers of the loan, then a deed in lieu of foreclosure will have a negative impact on your credit report. It will lower your score by 250 points.
To Viza,
As you're the guarantor of the loan, the deed in lieu or foreclosure will affect your personal credit score and lower it by 250 points.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To Mickey,
If your name is mentioned on the mortgage deed as one of the borrowers of the loan, then a deed in lieu of foreclosure will have a negative impact on your credit report. It will lower your score by 250 points.
To Viza,
As you're the guarantor of the loan, the deed in lieu or foreclosure will affect your personal credit score and lower it by 250 points.
Feel free to ask if you've further queries.
Sussane
If I pull all my resources and decide to complete my construction while FC is pending, can I stop FC?
What are the differences between short sale and deed in lieu?
Is one "better" than the other?
Is one "better" than the other?
hi viza,
you will have to complete the property as well as refinance the mortgage in order to pay off the construction loan in order to stop the foreclosure.
to hm,
the process of short sale and deed in lieu of foreclosure is more or less the same. in case of short sale, you will be liable for paying off the deficient balance whereas if you go for deed in lieu of foreclosure, you won't be liable to pay off the balance amount. a short sale will reduce your credit scores by 80-100 points whereas a deed in lieu of foreclosure will reduce your scores by 250 points. from the point of view of credit, short sale is a better option.
thanks
you will have to complete the property as well as refinance the mortgage in order to pay off the construction loan in order to stop the foreclosure.
to hm,
the process of short sale and deed in lieu of foreclosure is more or less the same. in case of short sale, you will be liable for paying off the deficient balance whereas if you go for deed in lieu of foreclosure, you won't be liable to pay off the balance amount. a short sale will reduce your credit scores by 80-100 points whereas a deed in lieu of foreclosure will reduce your scores by 250 points. from the point of view of credit, short sale is a better option.
thanks
How bad are the tax consequences going to be for me if I do a Deed in Lieu of Foreclosure? I still owe $95,000 and is probably only worth now $30,000 in Dearborn, MI. Does that mean I could pay taxes on the difference of $65,000 because of income tax on canceled debt?
Is a co-signer responianle for any debt with a D I L ?
is mortgage SAT after deed is recorded?
Hi Jason,
If it is your primary property, then depending upon the Mortgage Debt Relief Act, you won't have to pay any taxes.
To Guest,
The co-signer is equally responsible for the mortgage debt. If the property goes for a deed in lieu of foreclosure, then the co-signer's credit will also be affected.
To Frankie,
I did not understand what you wanted to mean by mortgage SAT. It will be better if you could explain your query in details.
Thanks
If it is your primary property, then depending upon the Mortgage Debt Relief Act, you won't have to pay any taxes.
To Guest,
The co-signer is equally responsible for the mortgage debt. If the property goes for a deed in lieu of foreclosure, then the co-signer's credit will also be affected.
To Frankie,
I did not understand what you wanted to mean by mortgage SAT. It will be better if you could explain your query in details.
Thanks
the lender has approved our deed in lieu and are awaiting the deed and papers to sign and get notarized. they asked us to sign also a promissory note for 1,000 at no interest for 3 years that will go to the insurance company that had the mip we paid every month. we said we would but now think it should not have to be signed? we had the loan for 7 years and paid mip monthly with each mtg pmt? also in sundays real estate paper the guy said that the
govt is giving homeowners 1,500 to turn over the keys so they wont have to foreclose and lose money with the extra time it takes to foreclose over deed in lieu? how do we find out more about this?
govt is giving homeowners 1,500 to turn over the keys so they wont have to foreclose and lose money with the extra time it takes to foreclose over deed in lieu? how do we find out more about this?
Welcome Guest,
It is not mandatory for you to sign the promissory note as in case of a deed in lieu of foreclosure, you won't be liable for paying the deficient balance to the lender. As far as I know keys can be transferred to the lender for a certain amount of money. You should contact an attorney and he may be able to let you know more in this matter.
It is not mandatory for you to sign the promissory note as in case of a deed in lieu of foreclosure, you won't be liable for paying the deficient balance to the lender. As far as I know keys can be transferred to the lender for a certain amount of money. You should contact an attorney and he may be able to let you know more in this matter.
I would like to submit a deed in Lieu. I am 100% on the financial portion of our mortgage loan, However myself and boyfriend are on the actual deed of the home. Does he have to sign and agree to process the deed in Lieu?
I bought a condo in 1997 and recently retired. Unfortunately, over the years I had to take a second mortgage. Both mortgages are abt. 90K and my condo is assessed less than that. To add to this, my HOA is in severe financial distress and I recently became aware that the property (58 units) may be condemned as the water bill has not been paid (arrerrage of 140K) insurance on the property is late and the county code enforcement has issued citations. Also, my unit has had a problem with two large trees that have shifted and are leaning into my unit resulting in the studs having pushed through the back wall and my roof leaks. None of this was fixed since I was told there is no money to fix repairs. I pay a monthly association fee of $224. but what is collected by those who do pay is not enough to pay the bills for the property. The stress of having to live in such a state, I am planning to rent an apt. Paying rent and two mortgages may be impossible. What are my options? Is a DIL somethning I may pursue?
I took a job out of state and it required us to move. We were able to purchase a home in the state we moved to, but also had a home where we moved from. When we moved my wife was out of work for 5 months so we were living on one income and got behind on our mortgage payments on the house where we came from. We have a realtor trying to sell the home and we have a possible buyer but we don't have enough money to bring to closing unless I clean out my 401k or borrow against it. We attempted a short sale but HUD turned us down. What's left to us?
I recently recieved my bankruptcy discharge,two days ago. I included my rental home in the bankruptcy. I called my bank to see if they wanted me to send them the keys and they claimed they had no idea i filed bankruptcy. Ok I am sure my Attorney contacted them?? My question is if I sign a deed in leiu of am I responsible to pay the bank anything or should I let them forclose? The house is vacant since dec 2010. We had renters and they left it a mess, house needs paint and new carpet and a good scrubbing. We are still paying rental insurance but I dont want to do that long term,unless I put another renter in it,however I dont feel that is moraly right.