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?
You should inform your tenants immediately about the deed in lieu so that can move out of the property and find another place to live in.
Hello,
I'm in a situation where my wife and I can't afford the mortgage payments. We informed the lender that we can't afford the monthly payment ahead of time so we suggested doing a deed-in-lieu. Now in talking to the lender, they told us to do a short sale for 3 months and call them up for a deed-in-lieu. It doesn't make sense that they suggested this even though we informed them that our house is not selling and we have exhausted our funds. What is the lender trying to do??? Was it a good idea to tell them ahead of time about the deed-in-lieu then waiting??? Do I need to have a lawyer involved in this??? Do you have any suggestion about my situation???
Thank you,
jaxx
I'm in a situation where my wife and I can't afford the mortgage payments. We informed the lender that we can't afford the monthly payment ahead of time so we suggested doing a deed-in-lieu. Now in talking to the lender, they told us to do a short sale for 3 months and call them up for a deed-in-lieu. It doesn't make sense that they suggested this even though we informed them that our house is not selling and we have exhausted our funds. What is the lender trying to do??? Was it a good idea to tell them ahead of time about the deed-in-lieu then waiting??? Do I need to have a lawyer involved in this??? Do you have any suggestion about my situation???
Thank you,
jaxx
Hi jaxx,
I think the lender has just given you an option of short sale. You may list the property at a lower price in the market once again and see if you can sell it or not. If you cannot sell the property, then you may again contact the lender for a deed in lieu. You may take the help of a lawyer and let him review your situation.
Thanks
I think the lender has just given you an option of short sale. You may list the property at a lower price in the market once again and see if you can sell it or not. If you cannot sell the property, then you may again contact the lender for a deed in lieu. You may take the help of a lawyer and let him review your situation.
Thanks
Welcome jonathan,
In case of a short sale, you are liable to pay the deficient amount resulting from the sale of the property. But in case of a deed in lieu, the lender forgives the deficient amount. You will be charged taxes on this forgiven amount.
Moreover, you should note that in a short sale, the credit score is lowered by 75-100 points whereas in deed in lieu, credit score is lowered by 250 points. As far as I know, a deed in lieu takes around 90 days to complete.
If you want to save your credit score, you can go for a short sale. Otherwise you may go for a deed in lieu.
In case of a short sale, you are liable to pay the deficient amount resulting from the sale of the property. But in case of a deed in lieu, the lender forgives the deficient amount. You will be charged taxes on this forgiven amount.
Moreover, you should note that in a short sale, the credit score is lowered by 75-100 points whereas in deed in lieu, credit score is lowered by 250 points. As far as I know, a deed in lieu takes around 90 days to complete.
If you want to save your credit score, you can go for a short sale. Otherwise you may go for a deed in lieu.
Situation:
My partner and I are trying to figure out the best way to unload a house that we can't sell and can't pay for. We were facing foreclosure several months ago, but managed to pull ourselves out of it, however, my partner filed bankruptcy in the process (the house is in her name). Now she has lost her job and I mine, we have moved to a different state and have had the house on the market for several months with no results. We will not be able to make the payment next month, but are not behind yet and want to get out from under it ASAP.
Questions:
1. Do my partner's bankruptcy limit or dictate our options?
2. Since we are not currently behind on the payments, do we need to wait until we are to do anything?
3. Considering she now already has a bankruptcy on her credit, does it really matter whether a foreclosure, short sale or deed-in-lieu goes on it now?
My partner and I are trying to figure out the best way to unload a house that we can't sell and can't pay for. We were facing foreclosure several months ago, but managed to pull ourselves out of it, however, my partner filed bankruptcy in the process (the house is in her name). Now she has lost her job and I mine, we have moved to a different state and have had the house on the market for several months with no results. We will not be able to make the payment next month, but are not behind yet and want to get out from under it ASAP.
Questions:
1. Do my partner's bankruptcy limit or dictate our options?
2. Since we are not currently behind on the payments, do we need to wait until we are to do anything?
3. Considering she now already has a bankruptcy on her credit, does it really matter whether a foreclosure, short sale or deed-in-lieu goes on it now?
hello,
we are over 3 months late now with our mortgage (due to husband's job loss) and, absent any 'cramdown' bankruptcy changes for mortgages, believe there is no way to save our home.
like many people in southern ca, we are very upside-down with our mortgage, and have an 80/20 mortgage after a refinance we had to do because our original loan was going to adjust very high.
at this point we feel our only options are either a deed in lieu of foreclosure or a foreclosure. from what i understand, ca has a law, which is set to expire at the end of 2009 (but possibly already extended) which will relieve us of a tax liability if countrywide lets us do a dil. is this true? i know there is a federal law that temporarily allows this as well.
my primary question is this: since ca is supposedly a nonrecourse state, can countrywide come after us for a deficiency if we foreclose? does it matter if our current loan is a refinance as opposed to the original loan?
thank you
i've done a great deal of online research on this, but the information is conflicting.
we are over 3 months late now with our mortgage (due to husband's job loss) and, absent any 'cramdown' bankruptcy changes for mortgages, believe there is no way to save our home.
like many people in southern ca, we are very upside-down with our mortgage, and have an 80/20 mortgage after a refinance we had to do because our original loan was going to adjust very high.
at this point we feel our only options are either a deed in lieu of foreclosure or a foreclosure. from what i understand, ca has a law, which is set to expire at the end of 2009 (but possibly already extended) which will relieve us of a tax liability if countrywide lets us do a dil. is this true? i know there is a federal law that temporarily allows this as well.
my primary question is this: since ca is supposedly a nonrecourse state, can countrywide come after us for a deficiency if we foreclose? does it matter if our current loan is a refinance as opposed to the original loan?
thank you
i've done a great deal of online research on this, but the information is conflicting.
If I do a Deed of Lieu - do they go into your personal bank account and take the money you have there? What about your credit cards? Do they close your credit cards? I have a ING DIrect account as well - do they go in there and take the little bit of money I got? Please help, Im concerned and im in the process of doing a Deed of Lieu...
Can the heirs be held responsible for the their deceased dad's mortgage? Can the mortgage company actually sue his boys (age 24 and 23) for any deficiency? The 24 year old draws SSDI off his dad's death and the 23 year old just completed college and is currently working as a part time muscian. Neither boy has any assets.
If you give a Deed in Lieu to the 1st mortgage lender, how do you get the 2nd mortgage lender to agree to discharge the lien. Would the 2nd lender agree to take back a promissory note for an amount much less than the debt [i.e., $25,000 on a $180,000 balance]?
What type of bankruptcy did your partner file? It's good that you are not behind on payments. But until and unless one is behind, lenders usually don't want to work out with borrowers. However, since you're in a different state, the lender may agree to accept a deed in lieu.
Since the house isn't getting old off, it's best to hand over the property to the lender. When you do so, you need to explain that in the forthcoming months it may be difficult for you to pay. Otherwise why would the lender agree to take back the property when you're making the monthly payments as required.
Has your partner included the mortgage in the bankruptcy? A deed in lieu is possible even though bankruptcy may have been filed. But the lender can't foreclose while your partner is in bankruptcy. There's an automatic stay declared on all legal action like foreclosure, wage garnishment etc.
Good luck
Since the house isn't getting old off, it's best to hand over the property to the lender. When you do so, you need to explain that in the forthcoming months it may be difficult for you to pay. Otherwise why would the lender agree to take back the property when you're making the monthly payments as required.
Has your partner included the mortgage in the bankruptcy? A deed in lieu is possible even though bankruptcy may have been filed. But the lender can't foreclose while your partner is in bankruptcy. There's an automatic stay declared on all legal action like foreclosure, wage garnishment etc.
Good luck
Hi Tam,
CA follows the non-recourse laws for purchase mortgages only. So, if Countrywide forecloses your property, it may come after you for the deficiency. However, if you go for a deed in lieu foreclosure, the lender won't have the right to collect the deficiency.
Take care
CA follows the non-recourse laws for purchase mortgages only. So, if Countrywide forecloses your property, it may come after you for the deficiency. However, if you go for a deed in lieu foreclosure, the lender won't have the right to collect the deficiency.
Take care
Hi Zee,
If you go for deed in lieu, nothing of what you have mentioned will happen. His is because the lender's right to collect the deficiency is waived off in deed in lieu.
If you go for deed in lieu, nothing of what you have mentioned will happen. His is because the lender's right to collect the deficiency is waived off in deed in lieu.
Hi,
To Texaslaw,
The heirs are not legally responsible but if the lender wants to foreclose the home when payment aren't made, then need to pay off the loan in order to keep their home.
To B&J,
The second lender may agree to forgive a part of the debt. He may even charge off the second mortgage. He will not discharge the lien just because the first foreclosed. The second lender may sell off the loan to collection agency who'll then collect the debt from you. Check out the discussion on 2nd mortgage deed in lieu to get a fair idea of what happens to second mortgage after deed in lieu on the first.
Good luck
To Texaslaw,
The heirs are not legally responsible but if the lender wants to foreclose the home when payment aren't made, then need to pay off the loan in order to keep their home.
To B&J,
The second lender may agree to forgive a part of the debt. He may even charge off the second mortgage. He will not discharge the lien just because the first foreclosed. The second lender may sell off the loan to collection agency who'll then collect the debt from you. Check out the discussion on 2nd mortgage deed in lieu to get a fair idea of what happens to second mortgage after deed in lieu on the first.
Good luck
I have a condo hotel unit in Palm Coast Fl. and its on a five year balloon and I have 1 more year and can't afford the payments and they are not renting to cover the expenses. The loan is 240,000.00 and I put 80,000.00 down and have paid interest of 40,000.00 to date. Is deed in lieu a solution.