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 DebbieDet!
Welcome to forums!
After your property is sold off through a deed in lieu of foreclosure, you will receive an eviction notice from your lender which will mention the time period within which you will have to leave the property. Once you surrender the property to the lender for a deed in lieu of foreclosure, you won't remain liable for paying taxes.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
After your property is sold off through a deed in lieu of foreclosure, you will receive an eviction notice from your lender which will mention the time period within which you will have to leave the property. Once you surrender the property to the lender for a deed in lieu of foreclosure, you won't remain liable for paying taxes.
Feel free to ask if you've further queries.
Sussane
we are in chapter 13, income is above $60,000. we are being transferred out of state, house is underwater and we have a home equity loan (taken to start a business that recession destroyed) with a different lender. we asked about refi but lender said it was not do-able because home equity loan is with different bank and they won't accept taking it over. we are completely at a loss. should we walk away from house(we are already in negativity all around in terms of credit so ???) and just go ahead to new state. i will not have income in new state as i am self employed (wall decorative artist) and a license is required in new place, along with the fact i am 60 and really too tired and worn to take the years needed to build a body of clientele. any advice would be gratefully appreciated!
If you don't have equity in your property, then you will be able to strip off your second loan. You can speak to your bankruptcy attorney in this regard. Then, you can walkaway from the property which may result in the foreclosure of your property and you won't be liable for the deficient balance resulting from the sale of the property.
We are currently going thru the process of DIL. If the Mortgage Co. does not get the amount of $ we owe by resale, can they request us in the future by garnishing our wage, our savings etc.. the difference?
i filed chapter 7 bankruptcy. at the meeting of creditors can i ask for a deed in lieu ?
Hi Tootie,
The mortgage lender will forgive the deficient balance resulting from the sale of the property in case of a deed in lieu of foreclosure. So, the question of wage garnishment does not arise.
To Jane,
You may request for a deed in lieu of foreclosure. It will be their discretion whether or not they will allow you the same.
Thanks
The mortgage lender will forgive the deficient balance resulting from the sale of the property in case of a deed in lieu of foreclosure. So, the question of wage garnishment does not arise.
To Jane,
You may request for a deed in lieu of foreclosure. It will be their discretion whether or not they will allow you the same.
Thanks
I'm presenting seeking a deed in lieu of foreclosure,but my ex-wife is not willing to provide to documents to the 2nd mortgage co.Bank of America,my 1st mortagage holder is excepting the info from myself,which I started the process after my left our home,also,my ex-wife Quick Claim the house over to me and it also in the Divorce Decree as well that she wants nothing to do with the house,Question,can I still be granted the Deed in Lieu ever if she refuses to provide her Info to the Mortgage Company?
welcome louis,
as far as i can understand, it might be difficult for you to qualify for a deed in lieu of foreclosure if the second mortgage lender does not receive the required documents/information from your ex-wife. you will have to somehow convince her to provide the second lender with the required information.
as far as i can understand, it might be difficult for you to qualify for a deed in lieu of foreclosure if the second mortgage lender does not receive the required documents/information from your ex-wife. you will have to somehow convince her to provide the second lender with the required information.
my lender counter-offered on a short sale but is asking me to pay a large amount on fees and other charges is a deed in lieu a better option for me because the amount the lender is asking for is excessive?
my lender counter-offered on a short sale but is asking me to pay a large amount on fees and other charges is a deed in lieu a better option for me because the amount the lender is asking for is excessive?
my lender counter-offered on a short sale but is asking me to pay a large amount on fees and other charges is a deed in lieu a better option for me because the amount the lender is asking for is excessive?
my lender counter-offered on a short sale but is asking me to pay a large amount on fees and other charges is a deed in lieu a better option for me because the amount the lender is asking for is excessive?
Hi Carlos,
As you think that the lender is asking for an excessive amount, it will be a better option to consider a deed in lieu of foreclosure. Moreover, if you go for a deed in lieu of foreclosure, you won't be liable for paying any deficient balance resulting from the sale of the property.
Thanks
As you think that the lender is asking for an excessive amount, it will be a better option to consider a deed in lieu of foreclosure. Moreover, if you go for a deed in lieu of foreclosure, you won't be liable for paying any deficient balance resulting from the sale of the property.
Thanks
buyer abandon the property i would like to do a deed in lieu of forclosure and for give him of his debt to me. what happens if i cannot locate the buyer
Hi Guest!
Welcome to forums!
As far as I know, if you're the lender, you can still foreclose the property or go for a deed in lieu of foreclosure if you can't locate the buyer. Nevertheless, you can contact a real estate attorney and take his opinion in this matter.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
As far as I know, if you're the lender, you can still foreclose the property or go for a deed in lieu of foreclosure if you can't locate the buyer. Nevertheless, you can contact a real estate attorney and take his opinion in this matter.
Feel free to ask if you've further queries.
Sussane