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Deed in lieu: Helps you stay away from foreclosure

Author: Jessica Bennet
Community Mentor
Ask Jessica
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?

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?
Are Deed in Lieu available in all states.
Posted on: 06th Jan, 2009 12:05 pm
Is the borrower still liable for the difference between what the mortgage is for and what the home is worth?
Posted on: 06th Jan, 2009 05:00 pm
Hi,

To NC G,

As far as I know, yes, deed in lieu is available in all the states.

To scary,

In a deed in lieu, the lender forgives the deficient amount resulting from the sale of the property. However, you should remember that you will be liable to pay taxes on that deficient amount.

Thanks.
Posted on: 07th Jan, 2009 01:47 am
Do you have to live in the house to file a deed in lieu? Our daughter lives in the house. We bought it for her and she is not paying and we cant pay for it.
Posted on: 07th Jan, 2009 06:18 am
Hey pab,

As far as I know, you do not need to live in the house for which you want to file a deed in lieu. If you are delinquent on payments, you can apply for a deed in lieu. However, it will be discretion of the lender whether he will accept a deed in lieu or not. To know more about deed in lieu, check out the following link:
http://www.mortgagefit.com/deed-lieu.html
Posted on: 08th Jan, 2009 12:42 am
Thanks!! We are not late on the mortgage. Being late would make our credit card rates rise. Will a deed in lieu make them rise also?
Posted on: 08th Jan, 2009 07:52 am
It may or may not affect your credit cards Pab. I guess it varies from lender to lender.
Posted on: 08th Jan, 2009 11:14 pm
I have a home that is worth more than the loan. Due to the death of my husband, my income has been cut more than half. I cannot offer the home and have made payments from life insurance money. Bank has already modified payment once. I do not want to loose remaining amt of life ins on a home that I will get no equity from. It has been on the market for 6 mos with no luck. What should I do??
Posted on: 09th Jan, 2009 08:13 am
I meant the loan is more than the value of the home.
Posted on: 09th Jan, 2009 08:19 am
What happens to the second mtg. if the borrower and 1st mtg lender agree to a deed in liew of foreclosure?
Posted on: 11th Jan, 2009 11:15 am
is there a differanance in credit scores for forclosure or deed in lieu. is a deed in lieu lookede at differant
Posted on: 12th Jan, 2009 02:07 pm
A deed in lieu lowers your credit score by 250 points. It is same with a foreclosure as well. A foreclosure remain in your credit report for at least 5 years from completion date and if you want to take a mortgage between 5 and 7 years, then you can only purchase a personal residence and you will have to give a minimum of 10% down. After 7 years you can get normal rates. A deed in lieu remains on the credit report for 4 years from completion date and it also requires a 10% down payment between years 4 and 7.

Thanks
Posted on: 12th Jan, 2009 11:06 pm
WHEN YOU USE THIS PROCESS OR OPTION- DOES THIS INCLUDE THE CONTENTS OF THE PROPERTY? (FURNITURE, APPLIANCES, ETC.)
Posted on: 13th Jan, 2009 09:33 am
Hi Deborah, I currently am up to date on the payments of my home but the payments have gone up and I will not be able to afford it anymore. Also my home is worth less than I paid for it. Is a deed in Lieu my best option?
Posted on: 13th Jan, 2009 10:49 pm
Hey WJBROWNE,

As far as I know, in a deed in lieu foreclosure, only the property is sold. You can take away your personal property while leaving the house.
Posted on: 13th Jan, 2009 11:02 pm
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