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... I purchased my townhome in '05 and in '11 HOA (Home Owners Association) passed the recorded the CC&R's that only 10 units out of 150 townhomes can be rented in the complex... I'm unable to pay my mortgage with my job pay cut and moved in a room mate to help make payments. The HOA sent me a letter saying that my renter has to move to be in cpnplienance with the new CC&R's. I owe more on my townhome than what the propery is worth... My mtg is 140,000 and value is 114,000.. In 2011 I got married and visit the home daily. Roomate would like to buy the place, but cant' at this time.
Hi Lindsey,
As far as I can understand, your property has been foreclosed by the lender. You can contact the lender and seek further clarification.
HI Debbi,
If your room-mate can't buy the property now, then you will have to let the lender or the HOA foreclose the property.
As far as I can understand, your property has been foreclosed by the lender. You can contact the lender and seek further clarification.
HI Debbi,
If your room-mate can't buy the property now, then you will have to let the lender or the HOA foreclose the property.
Our home is set to sell in foreclosure next Friday. We have been working with the bank for 2.5 years trying to short sell the property, but the bank kept giving us the run around even when we had a cash buyers. The last think we what is to foreclose on our property. What are our options...if any?
Hi Stefanie,
You can contact your lender and apply for a deed in lieu of foreclosure. However, it will be the lender's discretion whether or not he will consider your request for a deed in lieu of foreclosure.
Thanks
You can contact your lender and apply for a deed in lieu of foreclosure. However, it will be the lender's discretion whether or not he will consider your request for a deed in lieu of foreclosure.
Thanks
i want to know as we are not living in the property addressed home. we left the home and it is vacant since 2 years and half.i legged behind in paying morgage.
now the question is that my wife singnature is not in the Purchase Deed but her name in Trust of Deed means i think, she owns the property without any financial responsibily.the mortgage's lower file a petition in circuit court for getting singnature of my wife in purchase deed.what do i do? the final date of court on this 14th september.i cannot afford any lawyer. i face the litigation by my self.please advise me
now the question is that my wife singnature is not in the Purchase Deed but her name in Trust of Deed means i think, she owns the property without any financial responsibily.the mortgage's lower file a petition in circuit court for getting singnature of my wife in purchase deed.what do i do? the final date of court on this 14th september.i cannot afford any lawyer. i face the litigation by my self.please advise me
Welcome jeet,
As this is a legal issue, you will have to somehow manage to get a lawyer for yourself. Without a lawyer, it will be very difficult for you manage the whole matter. Moreover, you should note here that the lender will have the rights to file a case against you if you don't pay off the debts.
As this is a legal issue, you will have to somehow manage to get a lawyer for yourself. Without a lawyer, it will be very difficult for you manage the whole matter. Moreover, you should note here that the lender will have the rights to file a case against you if you don't pay off the debts.
Do you have to pay taxes on the amount the lender give you for the deed in lieu of foreclosure? $3000.00
If so, is it a 1099 income?
If so, is it a 1099 income?
What are the advantages y disadvantages to file a deed in lieu.
Welcome Jason,
If the amount is considered as an income by the IRS, then you will be liable for paying taxes on that amount.
Hi Rosa,
A deed in lieu of foreclosure will help you sell off the property and avoid the negative impacts of foreclosure. You won't be liable for paying the deficient balance resulting from the sale of the property to the lender. However, a deed in lieu of foreclosure will lower your scores by around 250 points and you won't be able to qualify for a new mortgage in the next 3-4 years.
If the amount is considered as an income by the IRS, then you will be liable for paying taxes on that amount.
Hi Rosa,
A deed in lieu of foreclosure will help you sell off the property and avoid the negative impacts of foreclosure. You won't be liable for paying the deficient balance resulting from the sale of the property to the lender. However, a deed in lieu of foreclosure will lower your scores by around 250 points and you won't be able to qualify for a new mortgage in the next 3-4 years.
How does this pertain to a timeshare deed in lieu of foreclosure in the state of Florida-mainly taxes. This was done in the Spring of 2012. Thanks
Hi flatarheel!
Welcome to forums!
In case of a deed in lieu of foreclosure for timeshare, the lender will forgive the deficient balance resulting from the sale of the property. The forgiven debt will be considered as your income by the IRS. But as the Mortgage Debt Relief Debt has been extended, you won't be liable for paying the taxes.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
In case of a deed in lieu of foreclosure for timeshare, the lender will forgive the deficient balance resulting from the sale of the property. The forgiven debt will be considered as your income by the IRS. But as the Mortgage Debt Relief Debt has been extended, you won't be liable for paying the taxes.
Feel free to ask if you've further queries.
Sussane
can a Deed in Lieu be attached to my assets?
Hi vwcbanks!
Welcome to forums!
A deed in lieu of foreclosure won't be attached to your assets. A deed in lieu of foreclosure will help you get rid of your property and the deficient balance resulting from the sale of the property will be forgiven by the lender.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
A deed in lieu of foreclosure won't be attached to your assets. A deed in lieu of foreclosure will help you get rid of your property and the deficient balance resulting from the sale of the property will be forgiven by the lender.
Feel free to ask if you've further queries.
Sussane
Could you tell me if a condo that has been rented out for less than a year would qualify for voluntary foreclosure or deed of lieu? We had purchased for our daughter and when she moved out we found a tenant. He totally trashed the unit, destroyed the carpet, and racked up over $500 in HOA fines. As you can imagine we do not want to rent this out again.
Hi Kathleen,
I don't think that the time period of renting will matter much while you apply for a deed in lieu of foreclosure. You can immediately apply for a deed in lieu of foreclosure if you want to get rid of the property.
Thanks
I don't think that the time period of renting will matter much while you apply for a deed in lieu of foreclosure. You can immediately apply for a deed in lieu of foreclosure if you want to get rid of the property.
Thanks