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?
Hi!
Welcome to forums!
To jack,
You need to contact your lender immediately and apply for a deed in lieu of foreclosure. The lender will judge your financial situation and let you know whether or not your request will be considered.
To Julie,
As the loan has been discharged and you haven't signed the reaffirmation letter, then you won't be liable for the mortgage dues any longer. You can leave the property. The lender will sell it off to recover the dues.
You will have to wait for 2 years after the bankruptcy discharge in order to qualify for a FHA loan. If you want a conventional loan, then you will have to wait for 4 years after the discharge.
To Isabella,
You won't lose your another property. However, after the foreclosure if you are unable to pay off the deficient balance, the lender will be able to place a lien on your other property.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
To jack,
You need to contact your lender immediately and apply for a deed in lieu of foreclosure. The lender will judge your financial situation and let you know whether or not your request will be considered.
To Julie,
As the loan has been discharged and you haven't signed the reaffirmation letter, then you won't be liable for the mortgage dues any longer. You can leave the property. The lender will sell it off to recover the dues.
You will have to wait for 2 years after the bankruptcy discharge in order to qualify for a FHA loan. If you want a conventional loan, then you will have to wait for 4 years after the discharge.
To Isabella,
You won't lose your another property. However, after the foreclosure if you are unable to pay off the deficient balance, the lender will be able to place a lien on your other property.
Feel free to ask if you've further queries.
Sussane
I'm now in a condo that is having a lot of problem. We are so far behind with our waterbill. They are threating to shut the water off. I would love to know if it is a way I can get out of the condo. I really don't think I can sell. I'm more than sure I will not get no where near what I paid for. This was my first and a very bad investment. Please let me know what options or if I have any options to get out of this. Thank you very much
Hi keiara,
You will have to contact your lender and apply for a deed in lieu of foreclosure. You need to write a hardship letter for this. This is one of the ways to get rid of your property. Moreover, you won't be liable for the deficient balance resulting from the sale.
Thanks
You will have to contact your lender and apply for a deed in lieu of foreclosure. You need to write a hardship letter for this. This is one of the ways to get rid of your property. Moreover, you won't be liable for the deficient balance resulting from the sale.
Thanks
Can you do a deed in lieu of foreclosure if you have a federal tax lien?
Hi Peg!
Welcome to forums!
Though you have a federal tax lien on your property, you can apply for a deed in lieu of foreclosure. However, as far as I know, the federal tax lien will get first priority while your property is sold off. The rest of the amount after paying off the tax lien will go towards your mortgage.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Though you have a federal tax lien on your property, you can apply for a deed in lieu of foreclosure. However, as far as I know, the federal tax lien will get first priority while your property is sold off. The rest of the amount after paying off the tax lien will go towards your mortgage.
Feel free to ask if you've further queries.
Sussane
My bankruptcy went through and all debts discharged on 6/2009. I contacted by certified letter to mortgage company that I wanted to relinquish property-They changed locks on Jan 9, 2010. Still showing on my banking information as active. Called bank-said I can do a Deed-In Leiu-Question they want hardship letter plus tax return from last year and my most recent 2 paychecks, and copy of the discharge papers. Are they going to require me to pay whatever deficiency there may be when they sell it and am I going to have to pay deed tax?
Hi gailifier,
The lender can ask for the bankruptcy discharge letter and the hardship letter but he will not be able to go after your pay checks or tax returns. I would suggest you to contact your bankruptcy attorney and ask him/her to deal with the lender.
The lender can ask for the bankruptcy discharge letter and the hardship letter but he will not be able to go after your pay checks or tax returns. I would suggest you to contact your bankruptcy attorney and ask him/her to deal with the lender.
What is the effect and what are the options if there is a 2nd mortgage on the DIL property?
hi tom,
deed in lieu of foreclosure will help you in getting rid of the property. your score will get reduced by 250 points and it will remain on your credit report for 7 years. you won't be responsible for paying the deficient balance resulting from the sale. if there is a second mortgage on the property, then you will be liable for paying off the mortgage dues.
deed in lieu of foreclosure will help you in getting rid of the property. your score will get reduced by 250 points and it will remain on your credit report for 7 years. you won't be responsible for paying the deficient balance resulting from the sale. if there is a second mortgage on the property, then you will be liable for paying off the mortgage dues.
Hello , I have a rental property in Az .that I cant afford anymore because of a divorce. The loan is for 200K but is worth 114 to 165k. I have no retirement and i have 16K in credit card debt. Would a deed in lieu be a way to go,and would I be on the hook for any outstanding balance left on the house if the bank sold it for less than what was owed ? Can Bankrutcy be used to save a rental property ? ty for your time.
hi scott,
a deed in lieu of foreclosure will help you to get rid of your underwater property. you need to contact your lender and apply for the same. in case of a deed in lieu of foreclosure, the deficient amount will be forgiven by your lender. thus, he won't be able to come after your other assets to recover the debts. however, it will have a negative affect on your credit report and your score would go down by 250 points. you should first check whether or not your lender accepts your request. in not, then you can think about filing bankruptcy.
a deed in lieu of foreclosure will help you to get rid of your underwater property. you need to contact your lender and apply for the same. in case of a deed in lieu of foreclosure, the deficient amount will be forgiven by your lender. thus, he won't be able to come after your other assets to recover the debts. however, it will have a negative affect on your credit report and your score would go down by 250 points. you should first check whether or not your lender accepts your request. in not, then you can think about filing bankruptcy.
Hi Chigurl!
Welcome to forums!
A lender will accept the request for a deed in lieu of foreclosure when you are delinquent on your mortgage payments. However, as you are facing hardship in paying off the mortgage dues, I would suggest you to contact your lender and apply for a deed in lieu of foreclosure. If the lender is convinced about your hardship, he will accept your request.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
A lender will accept the request for a deed in lieu of foreclosure when you are delinquent on your mortgage payments. However, as you are facing hardship in paying off the mortgage dues, I would suggest you to contact your lender and apply for a deed in lieu of foreclosure. If the lender is convinced about your hardship, he will accept your request.
Feel free to ask if you've further queries.
Sussane
My wife passed away 2 weeks ago., and we were only making the interest payments to stay here, We needed both of us to make the payments' just to get loan. Without her, I can not afford this place, nor do I want to stay here, renting out is not an option, I want to move out of state.
Any advise would be helpful
Any advise would be helpful
Hi trb!
Welcome to forums!
You can apply for a deed in lieu of foreclosure in order to get rid of the property. But this will have a negative affect on your credit report. Your score would go down by 250 points and you won't be able to get a loan for the next 3-4 years.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You can apply for a deed in lieu of foreclosure in order to get rid of the property. But this will have a negative affect on your credit report. Your score would go down by 250 points and you won't be able to get a loan for the next 3-4 years.
Feel free to ask if you've further queries.
Sussane