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?
To Alisa,
Both the owners will have to agree to the process of deed in lieu of foreclosure.
To Lady in Decatur,
You can apply for a deed in lieu of foreclosure. However, you should note that it will be the lender's discretion whether or not he will accept your request.
To Billbo,
You can apply for a deed in lieu of foreclosure in order to get rid of the property.
To Guest,
If the mortgage was discharged in your bankruptcy, then whether you go for a deed in lieu of foreclosure or a short sale, you won't be liable for paying off the deficient balance resulting from the sale of the property to the lender.
Both the owners will have to agree to the process of deed in lieu of foreclosure.
To Lady in Decatur,
You can apply for a deed in lieu of foreclosure. However, you should note that it will be the lender's discretion whether or not he will accept your request.
To Billbo,
You can apply for a deed in lieu of foreclosure in order to get rid of the property.
To Guest,
If the mortgage was discharged in your bankruptcy, then whether you go for a deed in lieu of foreclosure or a short sale, you won't be liable for paying off the deficient balance resulting from the sale of the property to the lender.
I mortgaged my home in 2007. I was laid off from my job in 2009. I have fallen several months behind in my payments as well as having my car repossessed that I purchased 3 weeks before I lost my job. Unemployment compensation is barely enough to live on. My wife and I have temporarily relocated to her brother's house in another city in hopes of finding work there. The house is currently vacant, even though it is still our primary residence. We plan to return if I can find employment there, which doesn't appear likely. Given my situation, would you recommend a DIL of foreclosure?
Hi jimmyd!
Welcome to forums!
You can apply for a deed in lieu of foreclosure if you want to sell off the property. You should contact your lender and apply for the same. A deed in lieu of foreclosure will reduce your credit scores by 250 points but you won't be liable for paying the deficient balance resulting from the property sale.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
You can apply for a deed in lieu of foreclosure if you want to sell off the property. You should contact your lender and apply for the same. A deed in lieu of foreclosure will reduce your credit scores by 250 points but you won't be liable for paying the deficient balance resulting from the property sale.
Feel free to ask if you've further queries.
Sussane
if i accept a deed in lieu hpw long do i have untill i have to be out of my home?
Hi purplelady,
After the deed in lieu of foreclosure sale, the lender will send you an eviction notice and you will have to leave the property within the time period mentioned in the deed.
After the deed in lieu of foreclosure sale, the lender will send you an eviction notice and you will have to leave the property within the time period mentioned in the deed.
What are the qualification for deed in lieu? How would i know this would be an option for me. Do the determine by your income and bills out , how do they figure it
Welcome shananna,
If you are facing hardship in paying off your mortgage and if you're delinquent on your loan payments, then you are eligible to apply for a deed in lieu of foreclosure. The lender will check your financial situation and let you know whether or not he will help you with this option.
If you are facing hardship in paying off your mortgage and if you're delinquent on your loan payments, then you are eligible to apply for a deed in lieu of foreclosure. The lender will check your financial situation and let you know whether or not he will help you with this option.
Hi Jessica,
My husband and I live in arizona and walked away from our primary residency of 5 years, two months ago. We both had taken significant pay cuts from the time of purchase vs now, and were able to get something else for significantly less (not quite sure how)... The bank has been calling like 10 times a day (we were ignoring their calls) Finally we answered and told them we were no longer in the home, nor were we planning on making anymore payments in the foreseeable future. The guy on the phone had mentioned contacting our lender to see if we could do a deed in lieu of foreclosure.
We originally put 60k down on the home, but are still upside-down by (Im guessing) at least 70K. Would we still be liable to pay any deed tax, or any other fees since we would be within the MDFTRA time frame? I looked up the deed tax and from what I saw, it was only $2.00 per deed vs most other states of like .10/100. Are my findings accurate?
Thank you!
Erika
My husband and I live in arizona and walked away from our primary residency of 5 years, two months ago. We both had taken significant pay cuts from the time of purchase vs now, and were able to get something else for significantly less (not quite sure how)... The bank has been calling like 10 times a day (we were ignoring their calls) Finally we answered and told them we were no longer in the home, nor were we planning on making anymore payments in the foreseeable future. The guy on the phone had mentioned contacting our lender to see if we could do a deed in lieu of foreclosure.
We originally put 60k down on the home, but are still upside-down by (Im guessing) at least 70K. Would we still be liable to pay any deed tax, or any other fees since we would be within the MDFTRA time frame? I looked up the deed tax and from what I saw, it was only $2.00 per deed vs most other states of like .10/100. Are my findings accurate?
Thank you!
Erika
Hi ekowalski,
If you go for a deed in lieu of foreclosure, you won't be liable for paying the deficient balance resulting from the property sale. When you transfer the property to the lender, you may be liable for paying deed tax. It will be better if you could contact your attorney and he will be able to guide you further in this regard.
If you go for a deed in lieu of foreclosure, you won't be liable for paying the deficient balance resulting from the property sale. When you transfer the property to the lender, you may be liable for paying deed tax. It will be better if you could contact your attorney and he will be able to guide you further in this regard.
I rec'd a form 1098a, then went thru a Deed-in-Lieu of Foreclosure
on a rental unit that I had. How do i report the sale of the rental property to the mortgage company for $3,000.00
on a rental unit that I had. How do i report the sale of the rental property to the mortgage company for $3,000.00
Hi bobalou,
You will have to contact a CPA in order to find out how you can report the deed in lieu of foreclosure when you're filing your taxes. The CPA will better guide you in this regard.
Take care.
You will have to contact a CPA in order to find out how you can report the deed in lieu of foreclosure when you're filing your taxes. The CPA will better guide you in this regard.
Take care.
From your explanation on deed tax, does it mean it can not be less than $1.65 and can not be more than $500 regardless of the difference between the fair market value and the mortgage balance and the necessary liens.
Whether it is a deed-in-lieu or a normal foreclosure, they are both a foreclosure and will show up the exact sale way on your credit report. Also, when you are asked "have you had a house that has been foreclosed on in the last 7 years", you still have to answer yes. The ONLY advantage to a deed-in-lieu is that it costs the bank less money and in some instances tens of thousands of dollars less, which mitigates deficiency and possible 1099 consequences for the the home owner. If your goal is to save as much of your credit as possible, you should consider a Short Sale.
My home is worth 230k. I owe $96k. It is a 20 year mortgage fixed at 6.32 % and my third year of owning it. However, I have lost my job and have had great difficultly landing another. And have falling behind on mortage payments by 4 months now, and the mortgage company has stopped accepting payments from me (just) recently. I don't want to lose my home...what is the alternative for me since I have a significant amount of equity in my home. But have received notice that I must contact the forclosure department. Just not sure what to do?
Here's my probem. Purchased condo in AZ in 2009 for $119,000 (I put $20,000 down and got the $8,000 tax credit), lost job 4 mo. later, after a year finally landed a job in TX; condos like mine are now selling for $93,000. I am an artist and it's not unusual to be job hunting every couple of years, so I've got an emergency fund set up for times of unemployment and would like to hold on to it for future lay offs.
I don't really want to rent my condo out and now will be paying rent in TX. I've never been late with a payment of any kind and just want out from under my mortgage in AZ. Do you think I would be a candidate for a deed in lieu of fc with my lending company? If so, should I discontinue making payments while to process is underway? Any suggestions would be appreciated.
I don't really want to rent my condo out and now will be paying rent in TX. I've never been late with a payment of any kind and just want out from under my mortgage in AZ. Do you think I would be a candidate for a deed in lieu of fc with my lending company? If so, should I discontinue making payments while to process is underway? Any suggestions would be appreciated.