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 MURRAY!
Welcome to forums!
The process is more or less the same. In a short sale, you'll have to list the property in the market for at least 3 months and check out if you can get buyers for your property. Moreover, it will depend upon the lender's discretion as to whether or not he will accept your request for short sale.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
The process is more or less the same. In a short sale, you'll have to list the property in the market for at least 3 months and check out if you can get buyers for your property. Moreover, it will depend upon the lender's discretion as to whether or not he will accept your request for short sale.
Feel free to ask if you've further queries.
Sussane
Hi Cookie!
Welcome to forums!
Rather than hiring an attorney, it will be better if you could directly negotiate with the lender for a deed in lieu of foreclosure. This will help you in getting rid of the property and you won't be liable for paying the deficient balance resulting from the sale of the property.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Rather than hiring an attorney, it will be better if you could directly negotiate with the lender for a deed in lieu of foreclosure. This will help you in getting rid of the property and you won't be liable for paying the deficient balance resulting from the sale of the property.
Feel free to ask if you've further queries.
Sussane
i know i will not be able to make payments in the future as my income has been greatly reduced. i do not forsee having any additional funds until i retire earley next year. would i be better off to go with a deed in lieu of modification?
Hi shirley,
If you don't want to keep the property and want to get rid of it, then it will be a good option to apply for a deed in lieu of foreclosure. You need to contact the lender for this. If the lender agrees to it, then you will be able to sell off the property and you won't be liable for paying any deficient balance to the lender.
If you don't want to keep the property and want to get rid of it, then it will be a good option to apply for a deed in lieu of foreclosure. You need to contact the lender for this. If the lender agrees to it, then you will be able to sell off the property and you won't be liable for paying any deficient balance to the lender.
who has the authority to approve keys for cash ,the bank or the usda?
Hi Guest,
It is the bank who will approve you for the keys for cash. You will have to negotiate with the bank for the same.
Thanks
It is the bank who will approve you for the keys for cash. You will have to negotiate with the bank for the same.
Thanks
i went bankrup they said the house is still mine its been two years dont know what to do
in 2005 my parents (currently aged 82 and 73) refinanced their mortgage with a interest only loan. their plan was pay on the loan for 5 years then do a reverse mortgage so they could retire. the loan was sold to freddie mac then to countywide (which is not bank of america). when countywide took over the loan in 2008 no paperwork was signed by parents showing any changes in the loan but countrywide began charging both principal and interest. my parents retired at the end of last year and b of a has denied two modifications. there is also a second mortgage that b of a owns. will the dil take care of the second mortgage also?
Hi beltran,
Unless you surrender the property to the lender, the property will remain in your name. I will suggest you to surrender the property to your lender who will foreclose it in order to recover the debts. I hope you haven't reaffirmed the mortgage. In such a situation, the lender won't come after you for recovering the deficient balance.
Hi tinawina,
Deed in lieu of foreclosure will mainly take care of the first mortgage. As far as the second mortgage is concerned, your parents will be liable for paying off the second mortgage in full.
Thanks
Unless you surrender the property to the lender, the property will remain in your name. I will suggest you to surrender the property to your lender who will foreclose it in order to recover the debts. I hope you haven't reaffirmed the mortgage. In such a situation, the lender won't come after you for recovering the deficient balance.
Hi tinawina,
Deed in lieu of foreclosure will mainly take care of the first mortgage. As far as the second mortgage is concerned, your parents will be liable for paying off the second mortgage in full.
Thanks
My husband and I lost our jobs late in 2006. In the same year we purchased a piece of vancant property. We can no longer pay our loan. It is now 2011 and we have used all of our savings. Would a deed in lieu be better than foreclosure?
Hi sandy!
Welcome to forums!
A deed in lieu of foreclosure will be a good option in order to get rid of the property and the mortgage. You should contact your lender and apply for a mortgage. If the lender is convinced about your financial situation, then he will consider your situation.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
A deed in lieu of foreclosure will be a good option in order to get rid of the property and the mortgage. You should contact your lender and apply for a mortgage. If the lender is convinced about your financial situation, then he will consider your situation.
Feel free to ask if you've further queries.
Sussane
I have voluntarily decided to walk away from my primary residence after I was able to find financing to purchase a new preimary residence. I can now no longer afford to make the payments on my orignal residence, nor do i wish to. Do you think that my original bank would consider a deed in lieu forclosure under these circumstances?
Hi Jeffrey!
Welcome to forums!
If you are facing financial hardship, then you can apply for a deed in lieu of foreclosure in order to get rid of the property. However, after a deed in lieu of foreclosure, your credit report will be affected and you may not qualify for another mortgage in the next 2-3 years.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If you are facing financial hardship, then you can apply for a deed in lieu of foreclosure in order to get rid of the property. However, after a deed in lieu of foreclosure, your credit report will be affected and you may not qualify for another mortgage in the next 2-3 years.
Feel free to ask if you've further queries.
Sussane
I am not behind in payments, but it is high, my taxes are so high that I did not pay 1st half this year-March. Value of my home is down $122,000?
I could not sell my house, I did have it listed.
I could not sell my house, I did have it listed.
There was a tax foreclosure on this property. The taxes were paid in the amount of $38,000 with another amount totaling $50,000. I received a deed in lieu of foreclosure which has been recorded. Now I'm asked to sign a contract for $500,000. What do I do. It has been almost a year.