Author:
Jessica Bennet
Community Mentor

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Avoid Foreclosure with a Deed-in-lieu

A common way to protect your property from being taken away by the lender on account of non-payment of your mortgage is a deed-in-lieu of foreclosure.

Deed-in-lieu is a process in which the borrower failing to satisfy the loan obligation hands over his property to the lender. The lender may then sell the property in order to retrieve a part or whole of the amount borrowed from the sale proceeds.

What is the process all about?

The process involves the signing of legal documents - the Agreement in Lieu of Foreclosure and a Warranty deed, quit claim deed or a grant deed. The first document reveals 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 latter with two forms - one which states that the debt is canceled and the other which refers to the waiver of the right to a deficiency judgment (the lender's right to ask for the unpaid debt amount if it is not recovered totally by the property-sale).

The agreement for deed-in-lieu is executed through an escrow company which receives the borrower's note (marked as "paid") from the lender. The escrow then records the deed used for transferring legal ownership of the mortgaged property and sends the note to the borrower. The borrower is thus released from the liability of the mortgage payments.

Does a borrower need to pay tax in the process?

Once a borrower gets a release from the loan, he may have to pay deed tax provided he doesn't qualify for the tax relief under the Mortgage Debt Forgiveness Tax Relief Act applicable till the end of 2009. As per the Act, one need not pay tax on canceled debt (unpaid loan balance which is forgiven by lender) resulting from deed in lieu.

However, in California, the Tax Relief Act has not yet come into effect. So, borrowers in California will have to pay deed tax on canceled debt which is considered as income. The tax is calculated on the basis of unpaid balance.

Now, even if the lender may not collect deficiency, the borrower may pay cash towards the unpaid debt to avoid a negative impact on his credit report. This extra cash serves to reduce the amount of unpaid debt which is the basis of the deed tax.

It may happen that the lender pays the borrower a certain sum of money in return for the deed-in-lieu when there is some equity in the property. In such a case, the cash offered to the borrower is added to the unpaid debt in order to determine the basis of the deed tax.

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deborah

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Posted: Fri Oct 07, 2005 12:09 pm Post subject: foreclosure/deed in lieu

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?

Blue

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Posted: Fri Oct 07, 2005 1:03 pm Post subject: RE:

Hi Deborah, Usually the owner of a property submits the deed in lieu when he is unable to meet his obligations and the property equity has gone to zero. When you find that you have little or no equity in your property and that refinancing or a private sale is not possible, you can go for a deed in lieu in order to avoid foreclosure which is time consuming and troublesome. Deed in lieu of foreclosure helps to prevent your credit rating from being severely damaged by a foreclosure. But you should remember one thing. You may have to pay conveyance taxes if you opt for a deed in lieu of foreclosure. All discrepancies may not be waived in a deed in lieu. In a foreclosure all the junior liens are wiped off whereas in a deed in lieu the junior liens remain on the property. Hope this information will help you. Regards, Blue

Art G.

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Posted: Mon Dec 05, 2005 11:47 am Post subject: Deed in lieu Vs. Foreclosure

I lost my job just after refinancing at 100% of my home value, with a 2-year pre-payment penalty. I was ready to go into foreclosure, as I found another job out of state. The bank offered a deed in lieu. Is there a down side to this? Ther are no other liens on the house. I cannot make payments.

Samantha

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Joined: 16 Sep 2005
Posts: 1459
Location: MASSACHUSETTS

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Posted: Mon Dec 05, 2005 12:01 pm Post subject:

Hi Art G, Welcome to MortgageFit Forums. I understand this is a tough decision to take. But since you have got a job now it is required that the matter is settled early. Deed in lieu will leave some effects in your credit report but it favorable compared to a foreclosure. Since you got a job out of state so I think you will not want to lose much time. Also as per your statement you don't have the money to pay off currently. In that case deed in lieu is a good option. You may go ahead with that, but be sure to check that you are relieved off all the liabilities. God bless you. For MortgageFit, Samantha _________________ Know how to compare lenders with mortgage booklet

michelle w

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Posted: Fri Dec 09, 2005 4:33 pm Post subject: deed in lieu of foreclosure

my husband and I bought a house in Oct 2001. I was layed off in nov of 2001. Now my husband as lost his job and has found another one in a different state but it pays a lot less. The strain of paying both the mortgage and for an apatment for my husband is getting to be too much. We have had our house on the market since august with not even an offer. our real estate agent as told us of an option "deed in lieu of foreclosure". what does that mean? Does it apply to me? Is it a good option? what are the draw backs?

Samantha

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Joined: 16 Sep 2005
Posts: 1459
Location: MASSACHUSETTS

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Posted: Fri Dec 09, 2005 4:53 pm Post subject:

Hi Michelle, Welcome to MortgageFit Forums. I can understand the difficulties that you are facing in this situation. But time does not stay the same way and will change soon for you. Your husband's condition will improve one day with caring wife like you to support him. Deed in lieu is the process by which the borrower can transfer the ownership rights of the property to the lender to avoid foreclosure. It is suitable generally when the private sale of the proerty is not possible and when you do not want to spend more time in a foreclosure. You can get rid of your mortgage which you don't want to keep now. I think it suits your situation. Involve an attorney in the matter so that you are assured of clearance from the mortgage through the deed. Actually deed in lieu can prevent severe damages of your credit done by a foreclosure. So it can be a good option for you under this condition. Time will improve Michelle for both of you. I strongly believe that. I have seen people in similar situations come out of the trouble soon. Feel free to ask us if you have any more doubts. God bless you. For MortgageFit, Samantha _________________ Know how to compare lenders with mortgage booklet

olozalap

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Posted: Tue Dec 20, 2005 4:54 am Post subject: joint ownership non married

In a joint ownership if one or the other party is unable to pay its half can a Deed In Leiu still be used.

jerry

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Joined: 17 Oct 2005
Posts: 541
Location: MICHIGAN

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Posted: Tue Dec 20, 2005 5:20 am Post subject: RE:

Hi, As far as I have heard, if one party cannot pay its half, then the deed-in-lieu of foreclosure can be applied only on his interest on the property. Thanks, Jerry.

peggy

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Posted: Tue Dec 20, 2005 6:47 am Post subject: deed in Lieu

Hi My house was for sale and under contract and the person backed out. I know have to homes I have been making the payments is this an option for me. It is getting very hard to make the payments. How bad will this effect my credit? [E-mail edited by Jessica, as per forum rules. Thanks.]

Niicss
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Joined: 03 Oct 2005
Posts: 927

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Posted: Tue Dec 20, 2005 7:04 am Post subject: RE

Yep, sometimes they backed out. Sell at FSBO you will sell faster and there most likely you will get more competitive price as paying big commissions to the agents can be bypassed. These agents care more about their fast money not their client. But they have to refund the buyer's earnest deposit, though some legal actions can be taken against them but rarely are the buyer's going to tie up their lives to pursue a lawsuit. Niicss _________________ Good is the Enemy of Great.

murphy

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Posted: Tue Dec 20, 2005 11:31 am Post subject:

Hi Peggy, If you want to sell it on your own then FSBO is a good option as stated by Niicss. But sometimes it becomes difficult to sell if you are not a professional. So, taking a professional can take away headache out of you. But be assured to choose the right agent to escape harassment. Consult with your friends and neighbors for recommendations. Shop around to pick up the most suitable one amongst the many available. A proper agent will help you to establish a fair price for your home. He will help you negotiate with the buyers and guide you to sell without much trouble. If you are wind up with two mortgages on two homes, you can opt for a bridge loan to make the double payments, although you need to be aware of the rates that is offered and should shop around for the best rate. So far you making regular payments on your mortgages, your credit record is not going to be affected, but in case of any failure it is definitely going to have a negative impact. Thanks, Murphy

mike anonymous

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Posted: Mon Dec 26, 2005 9:21 pm Post subject: deed snd lieu

if the bank agrees to a deed and lieu they are telling that its over they take back the house and dont come back to me for the difference is that true?? also what if the house was sold before or after the deed and lieu do i have to pay the diffence

Caron

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Joined: 19 Jul 2005
Posts: 1355
Location: florida

225.90 Dollars($)

Posted: Mon Dec 26, 2005 10:33 pm Post subject: RE:

Hi Mike, Welcome to MortgageFit Forums. Paying the difference between the sale price and the mortgage will depend on the negations you have had with the bank. Sometimes banks and lenders do allow this. This is known as short sale. So if your bank has agreed to a deed in lieu and then they get a sale price much lower than the unpaid loan balance, they do have th right to charge the remaining mortgage payments. But yes, if you can negotiate with them tactfully, then you may be allowed to get away with the balance. Often a short sale can be more complicated if the loan has been sold in the secondary market. Because then the lender needs to take permission from Freddie-Mac, one of the two major secondary market players. Thanks, Caron

Overwhelmed

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Posted: Sun Jan 01, 2006 6:24 pm Post subject: re: foreclosures vs deed in lieu

Is a deed in lieu less negative than a foreclosure in Kentucky, and how long does it take for a foreclosure. We have had money problems and can't catch up the mortgage payments and a foreclosure is close. We just are soooo tired of the hassle and won't some peace of mind. What do we do? Which road do we take?

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