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?
Hello Cpinon,
I think it will be better if you contact the lender on your own and talk to him about the deed in lieu of foreclosure and check if he is willing to accept that or not.
If things are not working then you may have a professional to handle your case. Even if the lender is ready to accept a deed in lieu, you may take the help of a legal professional to avoid complications.
I think it will be better if you contact the lender on your own and talk to him about the deed in lieu of foreclosure and check if he is willing to accept that or not.
If things are not working then you may have a professional to handle your case. Even if the lender is ready to accept a deed in lieu, you may take the help of a legal professional to avoid complications.
Hi Cpinon,
Welcome to this forum.
Contacting lender on yourself is a better option for you. Contact the lender ASAP and let him know your problem regarding your mortgage payments.
Feel free to ask if you have any further questions.
Thanks,
Larry
Welcome to this forum.
Contacting lender on yourself is a better option for you. Contact the lender ASAP and let him know your problem regarding your mortgage payments.
Feel free to ask if you have any further questions.
Thanks,
Larry
I agree with Jenkin7.
We are at the point that we don't care what the effects will be on our credit score. We just want out. With that said, what would be the best option to take with the least amount of out of pocket expense? We have a 80/20 mortgage and not a dime to spare. We have had our home on the market since April 2007 and several bites, but they've all fallen through. We moved out of state in September and have not been able to make our mortgage payments since October. We've lowered the price so much that if we were to get an offer now, we'd have to bring money to the table and we don't have any to spare. Any advice??
Again, we aren't concerned about our credit scores any longer. This experience has made us realize that mortgages are just not they are cracked up to be. We will rent for the rest of our lives if we have to.
Again, we aren't concerned about our credit scores any longer. This experience has made us realize that mortgages are just not they are cracked up to be. We will rent for the rest of our lives if we have to.
hi sunshine,
it's a good time to refinance any existing loan which one cannot pay off. so, if you are willing to do so, that could be an option. fixed rate mortgages are currently available at low rates, so you could well qualify and refinance both the loans combined.
alternatively, you can file a bankruptcy chapter 13 which will allow you to repay the loan through a 3-5 year repayment plan. you may not be concerned about scores but they are so important nowadays that even an employer doesn't like to recruit people having poor scores. if you can qualify for chapter 13, it will help you to repay a part of your debt and thus your score will improve.
if you wish to discuss further, please feel free to do so.
regards,
jessica
it's a good time to refinance any existing loan which one cannot pay off. so, if you are willing to do so, that could be an option. fixed rate mortgages are currently available at low rates, so you could well qualify and refinance both the loans combined.
alternatively, you can file a bankruptcy chapter 13 which will allow you to repay the loan through a 3-5 year repayment plan. you may not be concerned about scores but they are so important nowadays that even an employer doesn't like to recruit people having poor scores. if you can qualify for chapter 13, it will help you to repay a part of your debt and thus your score will improve.
if you wish to discuss further, please feel free to do so.
regards,
jessica
I am in the process of getting a deed-in- lieu, does the mortgage forgiveness debt relief act protect me from paying taxes on the difference between sale price and what is owed
Hi Chad,
The Mortgage Forgiveness Debt Relief Act is likely to protect you from paying taxes on the difference between the sale price and what is owed. But you need to fulfill certain conditions.
Refer to the criteria for mortgage forgiveness debt relief .
Regards,
Jessica
The Mortgage Forgiveness Debt Relief Act is likely to protect you from paying taxes on the difference between the sale price and what is owed. But you need to fulfill certain conditions.
Refer to the criteria for mortgage forgiveness debt relief .
Regards,
Jessica
I had to claim Chapter 7 in Oct 2005 . One of my debts that was discharged was my mortgage debt with my lender Countrywide. However, I remained in the property and continued to pay my mortgage up until this month. I have found that I simply cannot continue to pay my mortage payment anymore due to a relationship breakup and subsequent income loss associated with such. Basically i'm down to one income. Can I simply hand back the keys to the lender or do I have to go through the forclosure,or Deed-in-Lieu of forclosure process. My credit has been restored since I claimed the Bankruptcy and I do not want another hit to my credit. How will a Deed-in-lieu forclosure on this property affect my credit now after this property was already a discharged debt after the chapter 7 proceddings back in 2005??..Hope this makes sense!!
Rich,
Since your mortgage debt has alreday been discharged, the lender may not have expected you to carry on with the payments as the debt is simply canceled. Even then if you have tried paying a part of it, then hopefully it will improve your credit score. I think it will be ok if you just hand over the keys to the lender. The lender will not intiate a deed-in-lieu or foreclosure.
Since your mortgage debt has alreday been discharged, the lender may not have expected you to carry on with the payments as the debt is simply canceled. Even then if you have tried paying a part of it, then hopefully it will improve your credit score. I think it will be ok if you just hand over the keys to the lender. The lender will not intiate a deed-in-lieu or foreclosure.
thank you very much for getting back to me so quickly...one more question i forgot to ask.
after a brief dissussion with the lender yesterday, they had offered me a 10 year interest only loan (arm) with no penalties, no negative amortization or any other stirngs attached which would lower my payment from $2,400 to $1,900 until i could get back on my feet. not a bad deal however, if i refinance with them, will i still have the chapter 7 bankruptcy protection or would this be considered an "all new loan" which would negate the 2005 banckruptcy protection i was afforded. if i take them up on thier offer, i do not plan on living there 5 years from now..would you consider this a viable alternative..since this bankruptcy, i seem to be second guessing every financial decision i make and i am always trying to bounce things off people who know...thanks again
after a brief dissussion with the lender yesterday, they had offered me a 10 year interest only loan (arm) with no penalties, no negative amortization or any other stirngs attached which would lower my payment from $2,400 to $1,900 until i could get back on my feet. not a bad deal however, if i refinance with them, will i still have the chapter 7 bankruptcy protection or would this be considered an "all new loan" which would negate the 2005 banckruptcy protection i was afforded. if i take them up on thier offer, i do not plan on living there 5 years from now..would you consider this a viable alternative..since this bankruptcy, i seem to be second guessing every financial decision i make and i am always trying to bounce things off people who know...thanks again
I own 2 houses, one that I am the only person on title. We moved out of that home in Aug 2007 and bought a house with my new husband. I have been unemployed for 1 year and can not make the $2700 mortgage payments anymore. I am current and I have renters in the first house to help with payments but my renters only pay $1300 monthly. I know this will hurt my credit and I am ok with that, but how should I start the process to wash my hands of this one house? Will they come after my current house I live in? Should I stay current and call the bank and ask for a deed in lieu of forclosure? Do I need to get rid of my renters and put the house up for sale first? I need help...
Hi Rich,
As much as I understand, if you have filed chapter7, all your debts are wiped out. Now when you have an unpaid balance on the mortgage, you may or may not pay for it depending upon whether you wish to improve your credit record. Now that you have decided to pay off the loan, the lender may have given you an alternative to the repayment plan you had followed earlier.
However, what I am concerned about is that why do you have to refinance when your debt is already discharged. I feel it should be optional for you as to whether you accept the interest-only ARM or simply don't pay off the loan. Did you sign a reaffirmation agreement with the lender?
As much as I understand, if you have filed chapter7, all your debts are wiped out. Now when you have an unpaid balance on the mortgage, you may or may not pay for it depending upon whether you wish to improve your credit record. Now that you have decided to pay off the loan, the lender may have given you an alternative to the repayment plan you had followed earlier.
However, what I am concerned about is that why do you have to refinance when your debt is already discharged. I feel it should be optional for you as to whether you accept the interest-only ARM or simply don't pay off the loan. Did you sign a reaffirmation agreement with the lender?
First of all, talk to your renters and find out if they are willing to buy the property from you as well as assume or take over the mortgage. If they are willing to do so, talk to the lender about it. If he finds them as suitable creditworthy borrowers, he may agree to such a transaction.
I don't know the duration of the lease period. How long is it for? because if you wish to do a simple sale of the property, then the renters have to move out and they may not be willing to because they must have signed a contract. By the way, how is the home sales market in your area?
If the proceeds are worth considering, then you can pay a certain amount to the renters so that they move out but again this is just what I think of. And, whether you go for a simple sale, deed-in-lieu or even a short sale, the first option is not going to affect your credit but the other two will certainly affect and in all these cases you'll have to do something for the renters. Are you thinking of evicting them? that will not be a good thing though and I personally don't support.
Just in case your renters agree to move out, and you go for a short sale or deed-in-lieu (the latter isn't that easy compared to the former as lenders try not to go for the latter just because they can't collect the deficiency), the lender can place a lien on the current house only if you don't pay the deficiency asked for and they don't cancel the unpaid debt.
However, you are not in default, so you need to explain to the lender that you will have problems paying off the loan on the first house. Only then will be agree to some option by which you can get rid of the loan.
Hope I could explain things clearly.
If you have more queries feel free to talk further.
Regards,
Jessica.
I don't know the duration of the lease period. How long is it for? because if you wish to do a simple sale of the property, then the renters have to move out and they may not be willing to because they must have signed a contract. By the way, how is the home sales market in your area?
If the proceeds are worth considering, then you can pay a certain amount to the renters so that they move out but again this is just what I think of. And, whether you go for a simple sale, deed-in-lieu or even a short sale, the first option is not going to affect your credit but the other two will certainly affect and in all these cases you'll have to do something for the renters. Are you thinking of evicting them? that will not be a good thing though and I personally don't support.
Just in case your renters agree to move out, and you go for a short sale or deed-in-lieu (the latter isn't that easy compared to the former as lenders try not to go for the latter just because they can't collect the deficiency), the lender can place a lien on the current house only if you don't pay the deficiency asked for and they don't cancel the unpaid debt.
However, you are not in default, so you need to explain to the lender that you will have problems paying off the loan on the first house. Only then will be agree to some option by which you can get rid of the loan.
Hope I could explain things clearly.
If you have more queries feel free to talk further.
Regards,
Jessica.
Caron,
Thank you for getting back to me. I wanted to refinance the loan so that I could drastically lower the monthly payments and keep the house without having to go through the aggravation of moving again. As I mentioned, and you pointed out, the debt was discharged and I did not Re-affirm the Debt with them (so I am no longer personally responsible for repaying it). I simply kept paying the mortgage because we had two incomes and the payment wasn't a problem. That was when I had two incomes. I am down to one now and can't afford the monthly pmnt. If the Lender, Countrywide, would agree to new terms with a much lower payment, I might consider refinancing. If not, I will just hand the keys over to them...One of my major concerns here is that since I claimed Banckruptcy, My credit has rebounded. If I simply hand the Keys back to them now, can they put that on my Credit??? Since I am no longer personally responsible for the repayment of this debt, I am under the assumption that they cannot put anthing more related to this loan on my credit..Is this a correct assumption?
Thank you for getting back to me. I wanted to refinance the loan so that I could drastically lower the monthly payments and keep the house without having to go through the aggravation of moving again. As I mentioned, and you pointed out, the debt was discharged and I did not Re-affirm the Debt with them (so I am no longer personally responsible for repaying it). I simply kept paying the mortgage because we had two incomes and the payment wasn't a problem. That was when I had two incomes. I am down to one now and can't afford the monthly pmnt. If the Lender, Countrywide, would agree to new terms with a much lower payment, I might consider refinancing. If not, I will just hand the keys over to them...One of my major concerns here is that since I claimed Banckruptcy, My credit has rebounded. If I simply hand the Keys back to them now, can they put that on my Credit??? Since I am no longer personally responsible for the repayment of this debt, I am under the assumption that they cannot put anthing more related to this loan on my credit..Is this a correct assumption?
Rich,
I do agree with you. Since you are no longer responsible for the debt having been discharged from chapter 7, therefore the lender should not report it to the credit bureaus that you have surrendered the property.
You are just paying so that you can clear the debt even though it has been discharged and whatever payment you've been even after being discharged, will add value to your credit report. By the way, when did you last check your score and take out your credit report? If it's been long, then take a look again, may be you'd get some positive changes.
However, after having said that the lender should report if you hand over keys, I would still ask you to ask the lender directly because so many things have been happening in the industry the way they shouldn't.
Good luck
I do agree with you. Since you are no longer responsible for the debt having been discharged from chapter 7, therefore the lender should not report it to the credit bureaus that you have surrendered the property.
You are just paying so that you can clear the debt even though it has been discharged and whatever payment you've been even after being discharged, will add value to your credit report. By the way, when did you last check your score and take out your credit report? If it's been long, then take a look again, may be you'd get some positive changes.
However, after having said that the lender should report if you hand over keys, I would still ask you to ask the lender directly because so many things have been happening in the industry the way they shouldn't.
Good luck