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Deed in lieu: Helps you stay away from foreclosure

Author: Anonymous Post Date: 10th Apr, 2004 03:58 am Post Subject: Deed in lieu: Helps you stay away from foreclosure

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?

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.

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.


Posted on: 10th Apr, 2004 03:58 am
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?
Posted on: 07th Oct, 2005 01:03 pm
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.
Posted on: 05th Dec, 2005 10:47 am
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. And you can rebuild credit after deed in lieu of 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
Posted on: 05th Dec, 2005 11:01 am
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?
Posted on: 09th Dec, 2005 03:33 pm
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.

Through deed in lieu process, 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 property 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
Posted on: 09th Dec, 2005 03:53 pm
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