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 davidleft!
Welcome to forums!
If you're unable to pay off the mortgage and if both of you agree for a deed in lieu of foreclosure, then you can go ahead with this. You should contact your mortgage lender and apply for the same. It will be the lender's discretion whether or not he will accept your request for the same.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If you're unable to pay off the mortgage and if both of you agree for a deed in lieu of foreclosure, then you can go ahead with this. You should contact your mortgage lender and apply for the same. It will be the lender's discretion whether or not he will accept your request for the same.
Feel free to ask if you've further queries.
Sussane
I've been working on a dil with Fannie Mae and the bank for 7 months now. Finally may be making progress. I've been told that I need to vacate the propery before they will continue to consider the dil. Is this standard? Will I be accused of abandonment? They said they need to do an appraisal and this cannot be done until I leave the home. Should I leave or is this a way for them hold up the dil? How can I get them to guarantee the dil if I should leave?
Hi Denise!
Welcome to forums!
Well, not much lenders ask you to leave your property prior to deed in lieu of foreclosure. Before leaving the property you should clarify all your doubts with the lender. If required, 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!
Well, not much lenders ask you to leave your property prior to deed in lieu of foreclosure. Before leaving the property you should clarify all your doubts with the lender. If required, you can contact a real estate attorney and take his opinion in this matter.
Feel free to ask if you've further queries.
Sussane
We really need to walk away from our house.
Should we first try to do a Deed in Lieu or should we just walk and if we get a 1099C deal with it then as a hardship? We have minus $108,000 equity (one loan). Bought house at 245,000 worth 65,000 now.
Husband has job, I have been unemployeed for 3 years.
Can't make payments.
Any information would be greatly appreciated.
Should we first try to do a Deed in Lieu or should we just walk and if we get a 1099C deal with it then as a hardship? We have minus $108,000 equity (one loan). Bought house at 245,000 worth 65,000 now.
Husband has job, I have been unemployeed for 3 years.
Can't make payments.
Any information would be greatly appreciated.
Hi Stella,
I will suggest you to contact your lender and apply for a deed in lieu of foreclosure in order to get rid of the property. If you and your husband can proof hardship, the lender will consider your request and agree to a deed in lieu of foreclosure.
I will suggest you to contact your lender and apply for a deed in lieu of foreclosure in order to get rid of the property. If you and your husband can proof hardship, the lender will consider your request and agree to a deed in lieu of foreclosure.
We had a bankruptcy in 2009 and remodified our home late last year. However, even the remodified amount is a bit too much for us. we keep dipping into savings to stay afloat and have decided to leave the property and rent. Is it better to walk away from the property or do the deed in lieu? Are they equal as far as credit score/report is concerned? Thank you
Hi dncnqn,
It will be better if you could apply for a deed in lieu of foreclosure in order get rid of the property. If your request is granted, then you will be able to sell off the property and you won't be liable for paying off the deficient balance resulting from the sale of the property.
Thanks
It will be better if you could apply for a deed in lieu of foreclosure in order get rid of the property. If your request is granted, then you will be able to sell off the property and you won't be liable for paying off the deficient balance resulting from the sale of the property.
Thanks
call me i want more information 559-475-2336 thanck you
I would like a personal consultation with a professional in a deed in lieu
or forclosure but, I can seem to figure out who to talk to that can walk me through this maze. I called a Real Estate Lawyer and they said go to the bank that has you mortgage. I would like to actually consult with someone first. Do I go to a CPA or some other field?
Please help, I am at my witts end.
or forclosure but, I can seem to figure out who to talk to that can walk me through this maze. I called a Real Estate Lawyer and they said go to the bank that has you mortgage. I would like to actually consult with someone first. Do I go to a CPA or some other field?
Please help, I am at my witts end.
Hi Stella!
Welcome to forums!
It is your lender who will guide you regarding deed in lieu of foreclosure. If you want to get rid of the property as you cannot pay off the loan, deed in lieu of foreclosure will be of great help to you. It will not only help you to sell off the property but you won't be liable for paying off the deficient balance resulting from the property sale. However, it will lower your credit score by 250 points.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
It is your lender who will guide you regarding deed in lieu of foreclosure. If you want to get rid of the property as you cannot pay off the loan, deed in lieu of foreclosure will be of great help to you. It will not only help you to sell off the property but you won't be liable for paying off the deficient balance resulting from the property sale. However, it will lower your credit score by 250 points.
Feel free to ask if you've further queries.
Sussane
i requested a deed in lieu property is in only my name so why would my wife be required to sign it also?
Hi sassy,
Your query has been replied to in the given page: http://www.mortgagefit.com/Mortgage-Basics/why-would-my-wife-have-to-sign-along-with-me-a-deed-in-lieu-i-requested-when-her-name-isnt-on-the-property.html . Please take a look at it. I hope it will help you.
Thanks,
Jerry
Your query has been replied to in the given page: http://www.mortgagefit.com/Mortgage-Basics/why-would-my-wife-have-to-sign-along-with-me-a-deed-in-lieu-i-requested-when-her-name-isnt-on-the-property.html . Please take a look at it. I hope it will help you.
Thanks,
Jerry
Is a deed in lieu of foreclosure possible if there is a federal tax lien on the property?
I cant continúe in paying my condo, it is just getting heard, ever since I have retired with a limited income, I have not miss a payment, but I just can't live in this condition , could you help with some suggestions, thank you!
Hi!
Welcome to forums!
To fybrtn,
Deed in lieu may be possible but you will be liable for paying off the federal tax lien on the property immediately or through a payment plan.
To Wil,
You can list the property in the market and try to sell it off. You may even contact the real estate brokers who will help you in selling off the property.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To fybrtn,
Deed in lieu may be possible but you will be liable for paying off the federal tax lien on the property immediately or through a payment plan.
To Wil,
You can list the property in the market and try to sell it off. You may even contact the real estate brokers who will help you in selling off the property.
Feel free to ask if you've further queries.
Sussane