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?
when doing a short sale closing in Connecticut do you have pay city tax & state tax, i was told by attorney that as of July 2011 you did not have to pay conveyance tax
Hi Guest,
As far as I know, during a short sale, you won't be liable for paying city tax and state taxes. Nevertheless, you can contact a local tax adviser and take his help in knowing further information in this regard.
Thanks
As far as I know, during a short sale, you won't be liable for paying city tax and state taxes. Nevertheless, you can contact a local tax adviser and take his help in knowing further information in this regard.
Thanks
My husband left our home and decided not to pay the mortage. The house is going in foreclosure. My husband has decided to apply for a deed in lieu of foreclosure. Im still in the home, with daugthers. I received notice today that he want me to move in order to agree with lender. My name is not on mortage but it is on the deed. Can this be done without my consent?
Hi Guest,
As your name is mentioned on the property deed, your husband can't decide to sell off the property without your permission.
As your name is mentioned on the property deed, your husband can't decide to sell off the property without your permission.
I just purchased a home in February and things are not working. With just this little time in the home would I qualify for a DIL
Welcome marsha,
If you can convince the lender about your financial hardship, then you may qualify for a deed in lieu of foreclosure.
If you can convince the lender about your financial hardship, then you may qualify for a deed in lieu of foreclosure.
My wife is in complex situation, she was using a lawyer to pursue SS or DIL but after 4 months behind and in very last minutes a buyer willing to purchase the prop w/ a full price w/ AS IS condition but Bank of America already put it in "Foreclose" stage so in this very case, the realtors and the buyer's bank racing w/ the time to settle ASAP. But we have a faith we would be able to settled before something bad happening. My question - what would be her credit score after settlement and is there a way to restore eventhough she was behind few months?. Any inputs or suggestions are welcome.
Hi!
Welcome to forums!
The late payments will have a negative impact on her credit scores even though the mortgage payments are settled.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
The late payments will have a negative impact on her credit scores even though the mortgage payments are settled.
Feel free to ask if you've further queries.
Sussane
example- owe $150k, considering deed in lieu of transfer. Current value around $100k. Has been on market for 6 month with realtor. Would deed in lieu of trigger a tax burden? I no longer reside in the home, but did so as primary for 5 years. Left state and seeking to rebuild life elsewhere. thanks.
Welcome joey,
If the property is still in your name and if it is not sold off, then you will be liable for paying property taxes.
If the property is still in your name and if it is not sold off, then you will be liable for paying property taxes.
I was advised to short sale how do I do this what kind of info do I need and where do I get it? :roll:
Hi Guest,
If you want to go for a short sale in order to get rid of the property, then you need to contact your lender for the same. You will have to convince the lender about your financial hardship in order to get a short sale.
Thanks
If you want to go for a short sale in order to get rid of the property, then you need to contact your lender for the same. You will have to convince the lender about your financial hardship in order to get a short sale.
Thanks
When you file for deed in lieu, I've read that it takes about 3 months to process. Is one still responsible for mortgage payments during the processing time, or do banks add that to the deed?
Hi anonymous!
Welcome to forums!
When you apply for a deed in lieu of foreclosure, it is expected by the lender that you will be delinquent on your mortgage payments. So, mostly people don't pay their mortgage when they apply for deed in lieu of foreclosure.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
When you apply for a deed in lieu of foreclosure, it is expected by the lender that you will be delinquent on your mortgage payments. So, mostly people don't pay their mortgage when they apply for deed in lieu of foreclosure.
Feel free to ask if you've further queries.
Sussane
Got a letter from Chase that read "Please be advised that Chase on behalf of the owner completed a foreclosure proceeding or it accepted a deed in lieu of foreclosure. Property management Business Solutions has been retained by Chase to manage this property on their behalf. RPM will assist you while you continue to reside in the property." What does this actually mean?