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?
I dont think the lender will lower the payments. Even if they do it will be temporary. If they see that you do not have the means to keep up the payments in the long term, most lenders will work with you on a payment plan.
Since you have included the mortgage lender in your BK, then they will liquidate the home through the foreclosure process. You may still be able to deed in lieu instead.
Since you have included the mortgage lender in your BK, then they will liquidate the home through the foreclosure process. You may still be able to deed in lieu instead.
Need advice and directions. I bought a house with a friend as an investment property and agreed to sell the house after two years. It is two and a half years past, and we can't sell the house. The house has lost its value. It's at 550K and the loan is 690K. We bought the house with 0 down and paying interest only. We are current with the payments but in a couple of months I will not have the money to pay my half of the house. My partner is willing to give up the house cause she can't make the house payment on her own. In this case, I call the lender and they suggested deed in lieu foreclosure. they also ask me for two months bank statement and two check stub and all my bills and expenses. What is this all about and should I just provide them the info they requested....?? One more thing, my name is not on the loan. My name is on the title of the deed. Your help is greatly appreciated.
Hi Joe,
Welcome to our community forums.
Do you mean to say that you have been paying for the loan to cover up the price of your share of the house? But the loan doc does not have your name. So, your friend should have contacted the lender and it is he who needs to submit papers since he's on the loan.
What I can understand is, may be the lender wants his money back and so he has asked you to submit the papers because he wants to examine if at all you cannot pay off the loan. Actually he wants to review your financial situation. Are you sure you're not on the loan doc?
I feel you should have a straight talk with the lender and then even if he's well aware that you aren't on the loan and still asks for deed-in-lieu (dil), then you may ask your friend to go for it.
What i like about the deed-in-lieu is, it doesn't allow lenders to collect the deficiency or unpaid debt as in a short sale or foreclosure. Also, if your friend isn't in California, he need not bother about paying taxes in canceled debt as the law has changed now.
However, prior to accepting a dil, it is better to refer to the information available here and get an idea of how deed-in-lieu works .
Regards,
Jessica.
Welcome to our community forums.
Do you mean to say that you have been paying for the loan to cover up the price of your share of the house? But the loan doc does not have your name. So, your friend should have contacted the lender and it is he who needs to submit papers since he's on the loan.
What I can understand is, may be the lender wants his money back and so he has asked you to submit the papers because he wants to examine if at all you cannot pay off the loan. Actually he wants to review your financial situation. Are you sure you're not on the loan doc?
I feel you should have a straight talk with the lender and then even if he's well aware that you aren't on the loan and still asks for deed-in-lieu (dil), then you may ask your friend to go for it.
What i like about the deed-in-lieu is, it doesn't allow lenders to collect the deficiency or unpaid debt as in a short sale or foreclosure. Also, if your friend isn't in California, he need not bother about paying taxes in canceled debt as the law has changed now.
However, prior to accepting a dil, it is better to refer to the information available here and get an idea of how deed-in-lieu works .
Regards,
Jessica.
If there are unpaid property taxes, does a deed in lieu mean that the lender will assume these taxes?
Hi maureen,
The lender sells off property in deed-in-lieu and tries to recover the what you owe to him. Now, if there are unpaid/back taxes involved, the lender might pay them off to prevent any tax lien from being placed on the property. Otherwise, it would be difficult to sell the property. It has to be decided in agreement with the lender as to who will pay off the unpaid taxes.
Good luck
The lender sells off property in deed-in-lieu and tries to recover the what you owe to him. Now, if there are unpaid/back taxes involved, the lender might pay them off to prevent any tax lien from being placed on the property. Otherwise, it would be difficult to sell the property. It has to be decided in agreement with the lender as to who will pay off the unpaid taxes.
Good luck
hey Jessica, thank you for your advice. My name is not on the loan but I don't want to abandon my partner. She will have bad credit and I've since spoken with a Realtor lawyer and dil is as bad as foreclosure. Is there any other solutions for me to get out of the house without getting bad credit. She is single and she depends on her credit. Since I'm not on the loan docs, this have no affect on me if i just walk away. I can't have it.
Hi,
If you do not want to go for DIL then you can try out short sale. Short sale will have less negative effects on your credit but in that case you will have to pay the difference between the sale price and the due mortgage. But in DIL the lender cannot ask you for deficiency judgment as Jessica has also mentioned.
Feel free to ask if you have any further questions.
Best of luck,
Larry
If you do not want to go for DIL then you can try out short sale. Short sale will have less negative effects on your credit but in that case you will have to pay the difference between the sale price and the due mortgage. But in DIL the lender cannot ask you for deficiency judgment as Jessica has also mentioned.
Feel free to ask if you have any further questions.
Best of luck,
Larry
Hello,
I am in the middle of a stressful situation that perhaps you can help me sort out. My wife and I bought a house 2 years ago with only 5% down. 1 year later, I lost my job and we needed to move out of state in order to find new jobs. We were not in a position to put our house on the market because we wouldn't have been able to afford our mortgage payments during the "for sale" process. We decided to rent out the home short term (12 months) in hopes that our situation would improve and the market would correct itself so we could sell the property.
Our tenants are moving out next month and we will barely be able to afford our rent and other expenses where we live now AND our mortgage payments and associated expenses there as well. We are putting the home on the market in a few days, but the market is really bad in this area and we hardly have any (if any) equity in the home. We fear that even if we find a buyer, we won't be able to afford to come to closing with enough cash to pay the difference between the sale price and our payoff amount, the real estate commission and other associated fees.
Each month the home is on the market without a buyer we will be losing $1300. If we have the home on the market for 90 days and don't receive an offer that we can "afford" to accept, should we offer our lender DIL? Also, would we be eligible under the Mortgage Debt Forgiveness Tax Relief Act? We rented our home for the last 12 months, but at no point did we intend to use the house as an "investment" property. We simply rented it for a few months in hopes the market would turn around so we could "afford" to sell the house and be done with it. Any suggestion? Does DIL sound like a good fit for me?
I am in the middle of a stressful situation that perhaps you can help me sort out. My wife and I bought a house 2 years ago with only 5% down. 1 year later, I lost my job and we needed to move out of state in order to find new jobs. We were not in a position to put our house on the market because we wouldn't have been able to afford our mortgage payments during the "for sale" process. We decided to rent out the home short term (12 months) in hopes that our situation would improve and the market would correct itself so we could sell the property.
Our tenants are moving out next month and we will barely be able to afford our rent and other expenses where we live now AND our mortgage payments and associated expenses there as well. We are putting the home on the market in a few days, but the market is really bad in this area and we hardly have any (if any) equity in the home. We fear that even if we find a buyer, we won't be able to afford to come to closing with enough cash to pay the difference between the sale price and our payoff amount, the real estate commission and other associated fees.
Each month the home is on the market without a buyer we will be losing $1300. If we have the home on the market for 90 days and don't receive an offer that we can "afford" to accept, should we offer our lender DIL? Also, would we be eligible under the Mortgage Debt Forgiveness Tax Relief Act? We rented our home for the last 12 months, but at no point did we intend to use the house as an "investment" property. We simply rented it for a few months in hopes the market would turn around so we could "afford" to sell the house and be done with it. Any suggestion? Does DIL sound like a good fit for me?
Hi Guest,
Welcome to our community forums.
After reading through your situation, I shall suggest that you offer the lender a DIL and then see what he has to say. Considering the market and your financial situation, it's better to rent for a few months and have better control over your finances with a new job before you think of buying a new home again. So, you may hand over the keys to your lender. Also, lenders don't ask for the deficiency in a deed-in-lieu because that's how the law goes. So, there's no question of paying taxes on any deficiency.
Moreover, the tax payment on forgiven debt is applicable only in California unlike in other states where one need not pay the taxes as per the mortgage debt forgiveness debt relief act. Also, there are different criteria which one has to satisfy before he gets a tax break on forgiven debt .
Regards,
Jessica.
Welcome to our community forums.
After reading through your situation, I shall suggest that you offer the lender a DIL and then see what he has to say. Considering the market and your financial situation, it's better to rent for a few months and have better control over your finances with a new job before you think of buying a new home again. So, you may hand over the keys to your lender. Also, lenders don't ask for the deficiency in a deed-in-lieu because that's how the law goes. So, there's no question of paying taxes on any deficiency.
Moreover, the tax payment on forgiven debt is applicable only in California unlike in other states where one need not pay the taxes as per the mortgage debt forgiveness debt relief act. Also, there are different criteria which one has to satisfy before he gets a tax break on forgiven debt .
Regards,
Jessica.
My ex just moved out of a house we were trying to sell. I am thinking about moving in. Our real estate agent is in the process of doing a short sale on it. My attorney advised against doing the short sale (credit affected with any option on table), saying I should do a Deed in Lieu (bank cannot collect deficiency - 2nd mortgage with different lender will be owed $50,000.00). I have been by 2nd morgage lender they will charge off what is owed and come after me via wage garnishment, etc. Attorneys here say they cannot do that. 1st morgage co will not do a short sale. Attorneys tell me to do a deed in lieu. 1st morgage co say they will not go for it. I think I should do a deed in lieu anyway, and if they forclose, they foreclose. I would like to live in the house until all of this settles to save $. 1) should I do it (and how long will it be before I am extracated - notice of foreclosure just came to me). 2) what are the tax implications for short sale vs. deed in lieu vs. foreclosure?
Hi HoHum,
Welcome to the forum.
Lenders do not always approve DIL. So if you cannot be able to short sale then I think filing chapter 13 will be far better option than foreclosure. In most cases if you file chapter 13 you will retain the ownership of the house and the lender cannot be able to pressurize you to sell the house. The court will make an affordable chapter 13 plan for you and you can make the payments to the lender.
If you want to know more about "Which is right for you - bankruptcy or foreclosure?" check out this article at http://www.mortgagefit.com/bankruptcy/foreclosure-chapter13.html
Hope this helps you.
Feel free to ask if you have any further questions.
Best of luck,
Larry
Welcome to the forum.
Lenders do not always approve DIL. So if you cannot be able to short sale then I think filing chapter 13 will be far better option than foreclosure. In most cases if you file chapter 13 you will retain the ownership of the house and the lender cannot be able to pressurize you to sell the house. The court will make an affordable chapter 13 plan for you and you can make the payments to the lender.
If you want to know more about "Which is right for you - bankruptcy or foreclosure?" check out this article at http://www.mortgagefit.com/bankruptcy/foreclosure-chapter13.html
Hope this helps you.
Feel free to ask if you have any further questions.
Best of luck,
Larry
hi hohum,
i think the first lender has foreclosed, is that so? let me ask you – are you interested to keep the house. if yes, then filing chapter 13 makes sense provided you qualify for it. at least you can pay off the dues in the mortgage and then start afresh with the remaining payments on the balance. and, you'll be able to stop foreclosure too for a period of 3-5 years after which if you can continue with the payments, the lender won't even foreclose. he might even offer you a suitable repayment plan or allow you to refinance or sell the property and then pay off the loan. this way, you can prevent your credit from getting the hit.
since you have just received the foreclosure notice, i suppose you have around 60-90 days to do something to save your home. however do check this out from the notice or ask the lender as to when the date of sale has been fixed.
i suppose filing chapter13 will be a better option because the first lender isn't willing to do a deed-in-lieu which is better than going for short sale (though short sale would have hurt your credit more) as he won't be able to collect deficiency. but your second lender have said that they might go for wage garnishment. did you ask them how much they'd take out from your paycheck? this is something to be concerned about.
regarding the tax implications of short sale or deed-in-lieu, i would say that you may not have to pay tax if the deficiency is forgiven. please check out the discussions on tax break on mortgage forgiveness and tax ramifications of deed-in-lieu .
however, not all mortgage debt would qualify for forgiveness. there are certain criteria involved.
feel free to ask further questions.
regards,
jessica
i think the first lender has foreclosed, is that so? let me ask you – are you interested to keep the house. if yes, then filing chapter 13 makes sense provided you qualify for it. at least you can pay off the dues in the mortgage and then start afresh with the remaining payments on the balance. and, you'll be able to stop foreclosure too for a period of 3-5 years after which if you can continue with the payments, the lender won't even foreclose. he might even offer you a suitable repayment plan or allow you to refinance or sell the property and then pay off the loan. this way, you can prevent your credit from getting the hit.
since you have just received the foreclosure notice, i suppose you have around 60-90 days to do something to save your home. however do check this out from the notice or ask the lender as to when the date of sale has been fixed.
i suppose filing chapter13 will be a better option because the first lender isn't willing to do a deed-in-lieu which is better than going for short sale (though short sale would have hurt your credit more) as he won't be able to collect deficiency. but your second lender have said that they might go for wage garnishment. did you ask them how much they'd take out from your paycheck? this is something to be concerned about.
regarding the tax implications of short sale or deed-in-lieu, i would say that you may not have to pay tax if the deficiency is forgiven. please check out the discussions on tax break on mortgage forgiveness and tax ramifications of deed-in-lieu .
however, not all mortgage debt would qualify for forgiveness. there are certain criteria involved.
feel free to ask further questions.
regards,
jessica
I purchased a condo for $490k in july 2007 to remodel & sell. I invested $30k & have been making payments of $3500 each month all coming from the equity line on my 1st house. My equity is now maxed out at $150K The condo has been on the market since sept of 2007 with out any offer made on it. I have dropped the price to $500k so that I only pay off the loan amount of $46500 & closing costs but not my invested amount or payments made but still have not had any offers.
I would like to know what are my options are and how deed in liew effects my credit score as well as other options effect my credit score
Thank you very much'
Lee "LLD57@msn.com"
[Link deactivated as per forum rules. Thanks.]
I would like to know what are my options are and how deed in liew effects my credit score as well as other options effect my credit score
Thank you very much'
Lee "LLD57@msn.com"
[Link deactivated as per forum rules. Thanks.]
Hi Lee,
Did you talk to the lender about going for a deed-in-lieu? considering the fact that the market isn't going well, i don't think he will agree, but you can still give the proposal.
There are other options which may help you get through this situation. Please check out some of the foreclosure prevention options .
Also, read through the article on deed-in-lieu to find out how it can affect you.
Hope this helps...
God bless you.
Samantha
Did you talk to the lender about going for a deed-in-lieu? considering the fact that the market isn't going well, i don't think he will agree, but you can still give the proposal.
There are other options which may help you get through this situation. Please check out some of the foreclosure prevention options .
Also, read through the article on deed-in-lieu to find out how it can affect you.
Hope this helps...
God bless you.
Samantha
Where and how do i seek court protection if i need time,im unemployed,inncalifornia,alameda county,do i need to see an attorney? Please respond immedietely.my trustee sale is end of april