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 eveeace,
If you had a job, then you might have applied for loan modification in order to save the property. As you don't have job right now, the lender will not modify your loan. In such a situation, there are chances that the lender will foreclose the property in order to recover their dues.
To ljsa,
You should have financial hardship in order to convince the lender for a deed in lieu of foreclosure. Also, you should be delinquent on your mortgage payments for the same. Unless you're delinquent, the lender won't be ready to accept your request.
Thanks
If you had a job, then you might have applied for loan modification in order to save the property. As you don't have job right now, the lender will not modify your loan. In such a situation, there are chances that the lender will foreclose the property in order to recover their dues.
To ljsa,
You should have financial hardship in order to convince the lender for a deed in lieu of foreclosure. Also, you should be delinquent on your mortgage payments for the same. Unless you're delinquent, the lender won't be ready to accept your request.
Thanks
how long will the bank give you to vacate the house after a deed-in lieu- process has begun
For a deed-in-lieu,
1. is this something that the mortgage company or lender has to draft and initiate
2. can this be done by the borrower and/or borrower's attorney
3. MUST it be done through escrow
Thanks!
1. is this something that the mortgage company or lender has to draft and initiate
2. can this be done by the borrower and/or borrower's attorney
3. MUST it be done through escrow
Thanks!
Hi rusty,
After the deed in lieu of foreclosure sale gets over, the lender will send you an eviction notice and let you know the time period in order to leave the property. You will have to leave the property within the given time period.
Welcome Kat,
You will have to write a hardship letter and apply for a deed in lieu of foreclosure with your lender. The lender will judge your financial situation and let you know whether or not he will accept your request.
It is not mandatory to take help from an attorney. The borrower can apply on his/her own for a deed in lieu of foreclosure with his/her lender. It will depend upon the lender whether or not escrow had to be done.
After the deed in lieu of foreclosure sale gets over, the lender will send you an eviction notice and let you know the time period in order to leave the property. You will have to leave the property within the given time period.
Welcome Kat,
You will have to write a hardship letter and apply for a deed in lieu of foreclosure with your lender. The lender will judge your financial situation and let you know whether or not he will accept your request.
It is not mandatory to take help from an attorney. The borrower can apply on his/her own for a deed in lieu of foreclosure with his/her lender. It will depend upon the lender whether or not escrow had to be done.
I still don't understand, With a deed in lieu of how long do you get to stay in the house after you sign the papers
Hi rambo,
After your property is sold off at the auction through a deed in lieu of foreclosure, the lender will send you an eviction notice which will mention the time period within which you'll have to leave the property.
Thanks
After your property is sold off at the auction through a deed in lieu of foreclosure, the lender will send you an eviction notice which will mention the time period within which you'll have to leave the property.
Thanks
my ex husband and i bought our home 4 years ago (may 2007) right before the housing market crashed. we bought the house for $110,000 with a 30 year fixed mortgage and refinanced a year later to be in a 15 year, and 5.75 interest. we decided to make it the house we wanted and did some remodeling, ie new kitchen. about 10k.
we got a divorce about a year ago and i ended up with the house because at the time i made more than he did, i lost my job shortly after the divorce and tried to refinance and couldn, since i was so new at my job. i just tried to refinance last week, and everything was looking great until the appraisal came back... 89,000, i still owe $95,000 so i can refinance and get him off the loan and more importantly i can't lower my payments. i really cant afford to continue my payments. i havet been late on the mortgage yet, i have done everything i can to make it on time so that i would be able to refinance. its coming down to pay the mortgage or my other bills such as gas/utilities, which are all late right now... is a deed in lieu right for me?
we got a divorce about a year ago and i ended up with the house because at the time i made more than he did, i lost my job shortly after the divorce and tried to refinance and couldn, since i was so new at my job. i just tried to refinance last week, and everything was looking great until the appraisal came back... 89,000, i still owe $95,000 so i can refinance and get him off the loan and more importantly i can't lower my payments. i really cant afford to continue my payments. i havet been late on the mortgage yet, i have done everything i can to make it on time so that i would be able to refinance. its coming down to pay the mortgage or my other bills such as gas/utilities, which are all late right now... is a deed in lieu right for me?
Hi Jess,
Your query has been replied to in the given page:
http://www.mortgagefit.com/predeal/about51069.html
Please take a look at it. I hope it will help you.
Your query has been replied to in the given page:
http://www.mortgagefit.com/predeal/about51069.html
Please take a look at it. I hope it will help you.
My wife and I own a home in Illinois and we have made timely payments for 15 years and we both have excellent credit ratings. I am on social security disability and my wife accepted a new position in GrandRapids, MI. Her start date is 6-13-11 and we will need to rent in the GR area. Houses in our neighborhood are not selling and it has been this way for a couple of years. We will not be able to make a mortgage payment and a rent payment, and we doubt that we will be able to rent the home out prior to moving. DIL looks like the only option, can you offer sound advice.
If you're unable to pay the mortgage, then you and your wife can apply for the option of deed in lieu of foreclosure. However, you should note that you need to default on your mortgage payments so that the lender considers your request. Moreover, deed in lieu of foreclosure will reduce your credit scores by around 250 points.
My husband was murdered in our home in June of 2010, and I have not lived in the home since that time. The house has been on the market for over 8 months without a single offer. It is priced well below appraisal and what we paid for it in 2006. I currently live in the home I grew up in as my brother who was living here passed away in December. I will be purchasing this home from my other siblings in the near future. My credit score is very low already so am not too concerned about the deed in lieu affecting it. What I am concerned about is losing my current home because of the mess with the previous home. Is there any chance the lender could put a lien on this property?
Welcome robhop,
You should contact the lender and ask him to go for a deed in lieu of foreclosure asap. This will help you in getting rid of the property and the lender won't come after you for the deficient balance. Thus, the lender won't place a lien on your other property.
You should contact the lender and ask him to go for a deed in lieu of foreclosure asap. This will help you in getting rid of the property and the lender won't come after you for the deficient balance. Thus, the lender won't place a lien on your other property.
Is deed in lieu is a good option for the borrower when a loan is in default or a short sale ?
Hi unab,
Deed in lieu of foreclosure is one of the options which the borrower can go for in order to get rid of the property in case of a financial hardship. However, situations may vary and whether or not it is a good option will depend upon a person's specific situation.
Thanks
Deed in lieu of foreclosure is one of the options which the borrower can go for in order to get rid of the property in case of a financial hardship. However, situations may vary and whether or not it is a good option will depend upon a person's specific situation.
Thanks
IS THIS PROCEDURE THE SAME AS A "SHORT SALE?"
THANK YOU...
MURRAY JAFFE
THANK YOU...
MURRAY JAFFE