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 Jo D,
If your debt has been discharged in your bankruptcy filing and if you've not reaffirmed the mortgage, then the lender cannot ask you for any kind of payment.
Welcome Rodney,
Though the couple may have surrendered the property to the lender, the lender may not have foreclosed it yet. As a result, the couple is staying in that property.
If your debt has been discharged in your bankruptcy filing and if you've not reaffirmed the mortgage, then the lender cannot ask you for any kind of payment.
Welcome Rodney,
Though the couple may have surrendered the property to the lender, the lender may not have foreclosed it yet. As a result, the couple is staying in that property.
the lender want s me to sign a deed of lieu on my property however there is 10,000 balance owed that he wants paid back . If I sign a deed of lieu am I responsible for the money owed?
Adonis, this was a resort type property. We're not staying in it but I guess it would work the same as a house. Is that correct?
Hi!
Welcome to forums!
To big g,
If you go for a deed in lieu of foreclosure, then the lender has to forgive the deficient balance resulting from the property sale. However, if you sign an agreement stating that you will pay off the debt, then the lender can come after you for the money after the deed in lieu of foreclosure is over.
To Jo D,
As far as I can understand, though you're not staying in the property, it will work the same as a house.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To big g,
If you go for a deed in lieu of foreclosure, then the lender has to forgive the deficient balance resulting from the property sale. However, if you sign an agreement stating that you will pay off the debt, then the lender can come after you for the money after the deed in lieu of foreclosure is over.
To Jo D,
As far as I can understand, though you're not staying in the property, it will work the same as a house.
Feel free to ask if you've further queries.
Sussane
I WAS THINKING ABOUT DOING DEED OF LIEU IN NEXT MONTH BUT WILL THE MORTGAGE DEBT FORGIVENESS RELIEF STILL WORK FOR ME
Hi TONY,
The Mortgage Debt Forgiveness Relief Act is still in vogue in almost all the states. So, if your primary property goes through a deed in lieu of foreclosure, you won't be liable for paying the taxes resulting from the forgiven debt.
The Mortgage Debt Forgiveness Relief Act is still in vogue in almost all the states. So, if your primary property goes through a deed in lieu of foreclosure, you won't be liable for paying the taxes resulting from the forgiven debt.
I have a bit different situation; my brother and I are in the tittle of the property. I (alone) have a 1st mortgage for $57k and a 2nd for$133K. this is a rental property and my wonderful brother is renting the place to tenants that he handpicked (friends) who are not paying rent for the last 5 months and my brother does not want to evict this people out of there. I do not have the monies to evict this people out of my rental property and I am not in the rental contract . I either want to do a deed in lieu or a foreclosure. can the lender force my brother to sign the property to the bank or banks ? thanks.
Hi Juan!
Welcome to forums!
Your query has been replied to in the given page:
http://www.mortgagefit.com/predeal/about52984.html
Take a look at it. I hope it will help you.
Sussane
Welcome to forums!
Your query has been replied to in the given page:
http://www.mortgagefit.com/predeal/about52984.html
Take a look at it. I hope it will help you.
Sussane
I am in Michigan. My chapter 7 was discharged in January 11, I did not reaffirm my home. I did not include the home in the chap 7. I still maintain payments before and after the chap 7. However, the area is becoming very unsafe and I am considering walking away, but I am scared that it may show as a foreclosure on my credit report. I discussed this with my lawyer and he stated that because I did not reaffirm the home, the lender can not legally come after me for payments. I contacted the bankruptcty department of the lender and they stated that they have stop reporting to the credit bureaus since I did not reaffirm, however, I pulled my credit report in July and I see they are still reporting. What are my options? I am thinking about stopping payments on the house and letting it go in foreclosure so that I can move to a safer area. Is it true that they can't go after me and should have stop reporting to the credit bureaus? Please help, I'm so confused.
Hi,
Your query has been replied to in the given page:
http://www.mortgagefit.com/Mortgage-Basics/Walking-away-after-chap-7-discharge-will-it-be-reported-on-credit-report.html
Please take a look at it. I hope it will help you.
Thanks
Your query has been replied to in the given page:
http://www.mortgagefit.com/Mortgage-Basics/Walking-away-after-chap-7-discharge-will-it-be-reported-on-credit-report.html
Please take a look at it. I hope it will help you.
Thanks
if I do this how bad will my credit be hit?
Welcome Guest,
A deed in lieu of foreclosure will reduce your credit score by 250 points and will remain in your credit report for the next 7 years.
A deed in lieu of foreclosure will reduce your credit score by 250 points and will remain in your credit report for the next 7 years.
If I qualify for a deed in lieu. Am I going to have trouble If the house is in need of some finishing out of some remodeling projects I have started and cannot finish?
Hi Guest!
Welcome to forums!
It will be completely the lender's discretion whether or not he will consider your request for a deed in lieu of foreclosure when you've already started but not completed the remodeling of the house.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
It will be completely the lender's discretion whether or not he will consider your request for a deed in lieu of foreclosure when you've already started but not completed the remodeling of the house.
Feel free to ask if you've further queries.
Sussane
Hi,
My question is how long can I stay in my home if I decide on a deed in lieu instead of a foreclosure? I am thinking I would qualify, I just want out of my home and the payment, but don't have another place to live as yet. I am working, but I am trying for a loan modification but I was turned down in the past. I am also wondering about taxes, it is an escrow account so I am under the impression that the bank would be liable for taxes? Thank you!
My question is how long can I stay in my home if I decide on a deed in lieu instead of a foreclosure? I am thinking I would qualify, I just want out of my home and the payment, but don't have another place to live as yet. I am working, but I am trying for a loan modification but I was turned down in the past. I am also wondering about taxes, it is an escrow account so I am under the impression that the bank would be liable for taxes? Thank you!