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?
To help out our pool man and his son I bought an estate sale 1750 square foot 4 bd/4ba brick condo with a 2 car garage for $87,000 in December 2009 and let them live in it rent free over the winter if they remodeled it with an additional $13,000 I gave them for materials.
I then sold it to the 18 year old who had better credit than his dad for $115,000 @ 30/year 6% in May 2010 with a stipulation to secure a bank loan by June 1213. The Loan would be paid by the company proceeds most of it earned by the father with 25 years experience.
Their business is doing well and the son made every payment with $200 extra principal through February 2012. The loan balance is $112,000. Looking at comps in their area, this Condo is worth $150,000 minimum.
Because of a minor rift between them they have missed the March/April/May monthly payments and I can exercize the DIL if I wish. The have agreed to let the father become the primary owner of the property. He however has bad credit and will need to file for bankrupcy before he can take over the loan officially.
I like and respect these guys and would like to make this as painless and inexpensive as possible for them. Is there a way to let them keep the Condo, make their payments while the father files bankruptcy and then transfer the loan to the father from the son without the formality of the DIL process and possible tax consequences? Thanks for your help in advance.
I then sold it to the 18 year old who had better credit than his dad for $115,000 @ 30/year 6% in May 2010 with a stipulation to secure a bank loan by June 1213. The Loan would be paid by the company proceeds most of it earned by the father with 25 years experience.
Their business is doing well and the son made every payment with $200 extra principal through February 2012. The loan balance is $112,000. Looking at comps in their area, this Condo is worth $150,000 minimum.
Because of a minor rift between them they have missed the March/April/May monthly payments and I can exercize the DIL if I wish. The have agreed to let the father become the primary owner of the property. He however has bad credit and will need to file for bankrupcy before he can take over the loan officially.
I like and respect these guys and would like to make this as painless and inexpensive as possible for them. Is there a way to let them keep the Condo, make their payments while the father files bankruptcy and then transfer the loan to the father from the son without the formality of the DIL process and possible tax consequences? Thanks for your help in advance.
Hi Geno!
Welcome to forums!
If the property is transferred to the father before his bankruptcy filing, then he will have to include the property in his bankruptcy. The bankruptcy trustee can even sell off the property in order to pay off other debts. So, it won't be a good option to get the property transferred to him now. Once he receives a discharge from the bankruptcy filing, then the property and the mortgage can get transferred to him.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
If the property is transferred to the father before his bankruptcy filing, then he will have to include the property in his bankruptcy. The bankruptcy trustee can even sell off the property in order to pay off other debts. So, it won't be a good option to get the property transferred to him now. Once he receives a discharge from the bankruptcy filing, then the property and the mortgage can get transferred to him.
Feel free to ask if you've further queries.
Sussane
Thanks Sussane, When I transfer the property and mortgage from the son to the father after the bankruptcy is completed is it considered a 'sale' and all of the cost, paper work and tax consequences that follow or is there a way to transfer property and mortgage within a family that is not considered a sale? thanks.....
If you do the dil how should it be reporting to the 3 credit agencies.
Hi!
Welcome to forums!
To Geno,
As far as I can understand, it will be considered as sale. Moreover, you should note that immediately after a bankruptcy discharge, you won't be able to get qualified for a loan. You will have to wait for 2-4 years to get qualified for a loan.
To Rcvanfred,
A deed in lieu of foreclosure should be mentioned in your credit report if you go for one.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To Geno,
As far as I can understand, it will be considered as sale. Moreover, you should note that immediately after a bankruptcy discharge, you won't be able to get qualified for a loan. You will have to wait for 2-4 years to get qualified for a loan.
To Rcvanfred,
A deed in lieu of foreclosure should be mentioned in your credit report if you go for one.
Feel free to ask if you've further queries.
Sussane
Mortgage and deed under my wife name. She has no income. But why BOA need our tax returns and expenses report and I am VERY reluctant to give them my SS#, income and other info since I heard BOA is very slick and who knows what they are up to?
Thx for your responses Susanne. My wife is in the middle of processing a DIL and she has no income but BOA asking for Tax returns, financial report and 4056T. Only her name was in the deed and mortgage but WHY BOA looking for my info and records as well, WHY can't BOA just focus on my wife info and records. It has nothing to do with me so do I have an option not to disclose or give BOA any of my SS# and income and other details. She is using a Lawyer but the Lawyer is not helping so much so far. Please respond ASAP. :(
If the deed and the mortgage are solely in your wife's name, then the lender shouldn't ask for your documents. You should inform the lender that you wouldn't be giving the documents. They just can't force you for the documents.
I am perfectly agreed w/ you but the lawyer said that we have to submit the docs requested by BOA eventhough I am not part of the mortgage but since we are joint file in Tax returns then I have no choice otherwise BOA won't process my wife DIL request. Any other advises.
Hi Ozgrad!
Welcome to forums!
Well, in that case, I guess you will have to follow the lawyer's advice and submit a copy of all the required documents.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Well, in that case, I guess you will have to follow the lawyer's advice and submit a copy of all the required documents.
Feel free to ask if you've further queries.
Sussane
my wife and i bought a home back in 2000 or so. since then my wife and i have lost our jobs and i have found another, have been laid off and now work out of state. my family and i have been out of state for the last 5 years, we have made our payments on time, plus rent payment. we will no longer return to our original home and things are getting tight. due to the housing crash we now owe more than the home is worth. is a deed in lieu an option for me?
Hi unclefesteradams!
Welcome to forums!
Deed in lieu of foreclosure is the option for you. You will have to contact the lender and apply for a deed in lieu of foreclosure. The lender will check your financial situation and let you know whether or not you will be able to get qualified for a deed in lieu of foreclosure.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Deed in lieu of foreclosure is the option for you. You will have to contact the lender and apply for a deed in lieu of foreclosure. The lender will check your financial situation and let you know whether or not you will be able to get qualified for a deed in lieu of foreclosure.
Feel free to ask if you've further queries.
Sussane
How long after deed in lieu do you have to wait to purchase a home, why is it considered the same as foreclosure