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 karenstill,
As you have already filed bankruptcy, after the discharge, you can surrender the property to the lender and ask him to go for a deed in lieu of foreclosure. The HOA cannot evict you or ask for payments if you are still in bankruptcy filing.
As you have already filed bankruptcy, after the discharge, you can surrender the property to the lender and ask him to go for a deed in lieu of foreclosure. The HOA cannot evict you or ask for payments if you are still in bankruptcy filing.
We are about 100K upside down. We want to move asap. for many reasons. We have no debt. We are not behind in payments. We do not want a 'modification' as we want to move. We have great paying jobs. We have savings that could almost pay off the 100K based on our hard work and sacrifice for the last 20 years. We would hate to lose all that. What can we negotiate with the banks. We have a first mortgage 5 3/4% and second at 8% (don't think that matters as we just want to lessen our losses and move on). What can we and how to we approach banks? Thank you
Hi Guest!
Welcome to the forums!
You are in a tough situation. In such a situation, you can definitely apply for a deed in lieu of foreclosure. If the property gets sold off at a high price, then you will be able to get back the excess amount.
Feel free to ask if you've further queries.
Sussane
Welcome to the forums!
You are in a tough situation. In such a situation, you can definitely apply for a deed in lieu of foreclosure. If the property gets sold off at a high price, then you will be able to get back the excess amount.
Feel free to ask if you've further queries.
Sussane
We did a deed in lieu with our property earlier in this year. Now we have received a property tax bill. Is it our obligation to pay it or should we send it to the mortgage company?
Hi AW,
As the property has been sold off, you may not be liable for the bill. Nevertheless, you should get in touch with a tax adviser and take his opinion in this regard.
As the property has been sold off, you may not be liable for the bill. Nevertheless, you should get in touch with a tax adviser and take his opinion in this regard.
How to get rid of deed in my name after bankruptcy that was done to avoid paying deficiency set by the bank. How easy or difficult is it ? As simple as calling the bank. Should I ask for deed in lieu of foreclosure?
Hi Bo,
Yes, you can contact the bank and request them for a deed in lieu of foreclosure in order to get rid of the property.
Yes, you can contact the bank and request them for a deed in lieu of foreclosure in order to get rid of the property.
do both names on the deed have to sign an in deed lieu of foreclosure, or just the mortgage holder"
Hello, I have tried to get my home refinanced by the bank but for some reason they say due to my debt ratio, they are unable to refinance it at a fixed mortgage unless I have more income. Will a deed in lieu benefit me. I've been in my home 20 years & don't want to lose it also I'm current with my mortgage payment but unsure what lies ahead of me?