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?
Owe about 10,000 more on property due to a 2nd mortgage. Is this taken into consideration in the deed in lieu or will 2nd need to be paid in full before we're allowed to release the deed?
As I'm reading more entrees...I guess I've answered my own question. Can't file for deed in lieu because we're not late on payments. Just living pay check to pay check by the skin of our teeth....especially since the economy has sucked all our money away the last two years.
We bought a house with 80% loan from the back and a 20% carryback from the seller. So we pay the back and interest on the 20% to the seller until we can pay them a balloon payment for the 20%. If we foreclose on the 80% bank loan what about the 20% from the seller? Do we still owe them, can they sue us or what?
Hi!
Welcome to forums!
To kcol,
Yes, lenders do not allow a deed in lieu foreclosure unless you are past due on your mortgage payments. However, I would still suggest you to speak to your lender and see if he can help you with any other option. May be he agrees for a deed in lieu foreclosure.
To carolyn m,
A similar question has been answered in the given link:
http://www.mortgagefit.com/foreclosure/seller-carryback.html#70653
You can check out the link. I hope it helps you.
Feel free to ask if you have further queries.
Sussane
Welcome to forums!
To kcol,
Yes, lenders do not allow a deed in lieu foreclosure unless you are past due on your mortgage payments. However, I would still suggest you to speak to your lender and see if he can help you with any other option. May be he agrees for a deed in lieu foreclosure.
To carolyn m,
A similar question has been answered in the given link:
http://www.mortgagefit.com/foreclosure/seller-carryback.html#70653
You can check out the link. I hope it helps you.
Feel free to ask if you have further queries.
Sussane
i submitted my deed in lieu earlier this year around febuary. how long should it take? i am on the verge of declaring a chapter 7. please advise.
A deed in lieu takes 90 days to complete after the process is started. I guess your lender has not accepted the deed in lieu option. Check out with your lender about your deed in lieu application.
By the way why are you filing Chapter 7?
By the way why are you filing Chapter 7?
I live in California. My questions:
1) Does the Federal Relief Act apply to Federal taxes even in California?
2) How does one calculate the deed tax?
1) Does the Federal Relief Act apply to Federal taxes even in California?
2) How does one calculate the deed tax?
can I still ask for a deed in lieu , even if there is est. $9,000 in equity on the house?? why can't I ask for a deed in lieu before I default on future payments...? If I place my house on the market....It will not sell...So, I am trying to be proactive and help my credit score as much as I can by not being late and putting my house on the market.
But, I still would like to ask for a deed in lieu....So, I guess my question is this...I am not yet late on payment...I have equity in my house...I will put house on the market. But there will not be enough time to sell without future hardship ....So can I still ask for deed in lieu?
Thank you,
But, I still would like to ask for a deed in lieu....So, I guess my question is this...I am not yet late on payment...I have equity in my house...I will put house on the market. But there will not be enough time to sell without future hardship ....So can I still ask for deed in lieu?
Thank you,
Hi,
To Rosa,
Are you speaking about the Mortgage Debt Relief Act? As far as I know, if a lender agrees to forgive the deficient amount, you would be taxed on that forgiven amount. With the Mortgage Debt Relief Act, borrowers can get a tax relief on this forgiven amount.
To millygirl,
If you are not late on payments, I don't think the lenders will accept a deed in lieu. Lenders generally do not offer the options of deed in lieu, short sale or loan modification if you are not late on payments. You can list the property in the market and see if you can get buyers. If you are not facing any hardship paying the mortgage dues, I would suggest you to keep on paying the dues.
Thanks.
To Rosa,
Are you speaking about the Mortgage Debt Relief Act? As far as I know, if a lender agrees to forgive the deficient amount, you would be taxed on that forgiven amount. With the Mortgage Debt Relief Act, borrowers can get a tax relief on this forgiven amount.
To millygirl,
If you are not late on payments, I don't think the lenders will accept a deed in lieu. Lenders generally do not offer the options of deed in lieu, short sale or loan modification if you are not late on payments. You can list the property in the market and see if you can get buyers. If you are not facing any hardship paying the mortgage dues, I would suggest you to keep on paying the dues.
Thanks.
When does this act take effect in CA. Thanks Rich
Hi Rich,
As far as I know, the tax relief act has already been implemented in California. For further information about the law, check out the following link:
http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml
Thanks
As far as I know, the tax relief act has already been implemented in California. For further information about the law, check out the following link:
http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml
Thanks
we are facing foreclosure. we are 69 yrs old and my husband is in very bad health. he has been working but in nov. his doctor said he could no longer work. we have been trying to sell our home since june with no luck. we have missed two mortgage payments now and the bank calls everyday. i have written to our bank(chase) and asked them to please help us. up to now our credit was excellent--never missed or been late on a payment in 50 yrs. i have asked the bank to let us short sale because of the economy. i don't even know if this will help. our 401k is almost nothing and i don't know where to turn. we also have a second mortgage but it is with chase also. that is what is making our mortgage so high. we have had to do this because of my husbands health. his medical bills are astronomical. would a deed in lieu of forclosure help us??
Hi chrisgg
I can understand your situation. Both deed in lieu and short sale are similar processes wherein the lender will sell the property and recover the debts. In case of short sale, you will have to pay the deficient amount resulting from the sale of the property to the lender. However, you credit will not be much affected due to this. It will lower by 75-100 points. So if you want to save your credit you can look for short sale.
If your credit score is not important to you, then you can go for a deed in lieu. In this process, the lender will forgive the deficient amount but you will have to pay taxes on it. Moreover your credit will also be lowered by 250 points.
Thanks.
I can understand your situation. Both deed in lieu and short sale are similar processes wherein the lender will sell the property and recover the debts. In case of short sale, you will have to pay the deficient amount resulting from the sale of the property to the lender. However, you credit will not be much affected due to this. It will lower by 75-100 points. So if you want to save your credit you can look for short sale.
If your credit score is not important to you, then you can go for a deed in lieu. In this process, the lender will forgive the deficient amount but you will have to pay taxes on it. Moreover your credit will also be lowered by 250 points.
Thanks.
I purchased my home with downpayment assistance. I have a $25K state bond as well as a 1st with a lender. if I do a deed in lieu and the sale of the home is not enough to cover the state bond, what happens to that obligation? will I be reliable for that?
hey, in deed in lieu the deficient amount is forgiven by the lenders. I guess the amount owed on state bonds will also be forgiven. It's better if you can check out with your lender.