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?
Welcome.
You can look through this site: http://www.alameda.courts.ca.gov/courts/
Hope this would be some help for you.
Let me know if you have any more queries
You can look through this site: http://www.alameda.courts.ca.gov/courts/
Hope this would be some help for you.
Let me know if you have any more queries
what if yu have an equity line attached as well as 1st mort..and what if you have other property will they come after that to satisfy loans..
hi raquel,
welcome to the forum.
if the lender accept the deed in lieu then it is expected that he will not ask you for the deficiency judgment.
have you taken both the loan form the same lender? if not then is the lender of your second mortgage also accept the deed in lieu?
best of luck,
larry
welcome to the forum.
if the lender accept the deed in lieu then it is expected that he will not ask you for the deficiency judgment.
have you taken both the loan form the same lender? if not then is the lender of your second mortgage also accept the deed in lieu?
best of luck,
larry
Currently my brother has not made a mortgage payment since approximately October 2007. It is now April 2008 and he figures the eviction notice is going to come around the first of June. It sounds like deed in lieu of foreclosure is the best way for him to go. He is employed, but between the child support and alimony he can not make the mortgage payments. Unfortunately, the mortgage is more than the house is worth. Is it to late for a deed in lieu or should he try some other avenue?
I just found out from my brother the bank has already started the foreclosure process. Is it too late to request the deed in lieu of foreclosure since the process according to him has already begun? I guess worse case scenario is he won't be any worse off.
Hi cpapkt,
Welcome back.
Now have you told the lender about your problem and checked out the options available for you?
You can request for deed in lieu even after the foreclosure process is started.
Best of luck,
Larry
Welcome back.
Now have you told the lender about your problem and checked out the options available for you?
You can request for deed in lieu even after the foreclosure process is started.
Best of luck,
Larry
My mom pasted away and was purchasing a time-share property which I can neither continue to pay or pay off. I was not listed on the loan but was listed on the title of ownership in case something happened to her. The company would like me to sign a WDIL and avoid foreclosure. My question is that they are saying even if I wasn't on the loan my credit would be impacted with the foreclosed property, is this true?
Hi,
Did the lender suggest you to sign a deed in lieu of foreclosure? I think if you can sell the property and pay off the lender then it will be better as DIL will have negative effect on your credit report. But if you cannot sell the property then you can go for DIL.
"they are saying even if I wasn't on the loan my credit would be impacted with the foreclosed property, is this true?"
Yes it is true. But it will not effect as much as if you were also on the mortgage.
Let me know if you have any further questions.
Did the lender suggest you to sign a deed in lieu of foreclosure? I think if you can sell the property and pay off the lender then it will be better as DIL will have negative effect on your credit report. But if you cannot sell the property then you can go for DIL.
"they are saying even if I wasn't on the loan my credit would be impacted with the foreclosed property, is this true?"
Yes it is true. But it will not effect as much as if you were also on the mortgage.
Let me know if you have any further questions.
I have a 1st mortgage and equity line of credit on my home for a total of 967K(630K and 337K). With today's market value of homes, my house only appriased for 1075K even though I have 1175K into it. I have had the house for sale for 9 mos already. I am approaching a position of no longer being able to afford the two combined payments. I have done some reading on Foreclosure and DIL options but all the articles say about the same thing. My credit score is 820+ and I have worked hard to keep my credit score favorable. Im trying to understand if my credit rating will nose dive if I foreclose(likely so) vs DIL and if I will likely be responsible for any other differences in what I owe vs if the bank(DIL Option) doesnt produce enough to cover both the primary and junior lien (equity Line) and if so will the option be to bankrupt to save myself from paying the large sum difference? I have sought an attorney to assist with getting advice and normal results but Im having trouble identifying someone who sepcializes specifically in representing the consumer/private home owner in this situation. I live in NE Atlanta suburbs. Additionally, if I DIL, and when/if the bank were to sell my house, and if the proceeds were more than my 1st mortgage, would the proceeds of the house go to cover my junior lien too? Thanks for any advice and direction!
hi guest,
welcome to the forum.
certainly deed in lieu is better than foreclosure because you can avoid deficiency judgment but i think it should be your last option to choose.
you have really very good credit score. so do not hamper it by going through foreclosure, dil or filing bk. if you can please avoid these. these relieves are for the people who can do nothing but have to choose it.
but i believe you can avoid these. first of all talk with the lender asap and check out if he can work out any repayment plan for you.
now do you have arm? why don't you refinance and turn it into frm with lower monthly payments. i think you can go for no-obligation free consultation from the rated mortgage lenders and mortgage professionals of this community to see what should be the best option for you to choose.
feel free to ask if you have any further questions.
best of luck,
larry
welcome to the forum.
certainly deed in lieu is better than foreclosure because you can avoid deficiency judgment but i think it should be your last option to choose.
you have really very good credit score. so do not hamper it by going through foreclosure, dil or filing bk. if you can please avoid these. these relieves are for the people who can do nothing but have to choose it.
but i believe you can avoid these. first of all talk with the lender asap and check out if he can work out any repayment plan for you.
now do you have arm? why don't you refinance and turn it into frm with lower monthly payments. i think you can go for no-obligation free consultation from the rated mortgage lenders and mortgage professionals of this community to see what should be the best option for you to choose.
feel free to ask if you have any further questions.
best of luck,
larry
Larry et al, My first mortgage is fixed 5.5 and my equity line is prime plus 3/4%. My core issue is that my wife is no longer working and we have a lot of medical bills that will conitunue to add up. We are no longer financially able to meet the monthly mortgage and 2nd. After trying to sell the house for the last 9 months we are starting to reach the end of our financial means to make all of our monthly financial commitments. I'm trying to fully understand if I go the DIL route if my credit will be scared long term and if the 1st mortgage company sells the house if everything over their selling price would go to pay the 2nd automatically since they're a lien holder. If the total amount selling the house doesnt cover both, would I likely then be responsponsible for the remainder of any outstanding balances - which could be 100K - 200K, depending on what they may be able to sell the house for given the current market conditions. IF Im still liable and responsible for any remaining monies, as indicated of the possible amounts, I'm thinking then that I would have to go the Bankruptcy route to get relief from the debt. As you can read from this and my previous posting, Im trying to get a full picture of my exposure and plan accordingly. This situation of oweing money and not being able to pay my creditors is a completely new thought process for me as I have always maintained my credit and debt within the highest sense of importance and have never been late on any payment for 30 years. Thanks again for your advice! Larry, thanks for responding - Brian.
Hi Brian.
Welcome back.
Now you cannot sell your property right. So if you go for deed in lieu of foreclosure then both of the lenders will have to agree. If the second lender do not agree then there is no use going for DIL because he can come after you for the due debt.
So I think it is better if you file Bk chapter 13. Thus you can protect your property and the lenders also cannot come after you. You can pay the mortgage with an affordable repayment plan. Check out how Bk chapter 13 works at http://www.mortgagefit.com/bankruptcy/foreclosure-chapter13.html
Feel free to ask if you have any further questions.
Best of luck,
Larry
Welcome back.
Now you cannot sell your property right. So if you go for deed in lieu of foreclosure then both of the lenders will have to agree. If the second lender do not agree then there is no use going for DIL because he can come after you for the due debt.
So I think it is better if you file Bk chapter 13. Thus you can protect your property and the lenders also cannot come after you. You can pay the mortgage with an affordable repayment plan. Check out how Bk chapter 13 works at http://www.mortgagefit.com/bankruptcy/foreclosure-chapter13.html
Feel free to ask if you have any further questions.
Best of luck,
Larry
I own a house, in my name only, married and moved into husband's home, have tried to sell my house, tried to rent it, no luck on either. It is an older house, newer and new ones for sale at same price. I also have a second on the house. My husband recently lost his job, so our income is greatly reduced. I have been using credit cards to make ends meet. I feel I must rid myself of the house payments - both the first and second. I was advised of a Deed in Lieu of Foreclosure being a way to solve my predicament. What can you tell me? How does this work with the second? I was told a short sale would not work because of the amount owed for both of the loans. I do not know what happens to the second when the first gets the Deed (the first could sell the house for what the first loan is - it is the second that I am very worried what they will/could do). I will appreciate hearing your opinions and thoughts on this. Thanks
Welcome Khuasteen.
I can understand your situation and I think deed-in-lieu is the right way to get out of the debt on your home. This is because even if you lose this home, there is at least your husband's home, so it's not that you have to rent anywhere.
Now, when you say you're using credit cards to make ends meet, it's something serious and your finances are not in control then. Well, I suggest you try to look out for a part time job or freelancing at least so that you can carry out daily expenses. Avoid using credit cards for daily spending because this will add on to your debt which you need to pay off.
Now, when you go for deed-in-lieu, it's like you are giving away your property to the first lender. So, the second lender can obviously ask for his payments. Ideally the first lender should pay off the second. But the first may not be able to retrieve the sale proceeds as much as is required to satisfy the balances on both the loans. In such a case, the second lender may charge-off the debt.
To know more on what happens to the second after deed-in-lieu on the first , refer to a previous discussion on this topic.
Thanks.
I can understand your situation and I think deed-in-lieu is the right way to get out of the debt on your home. This is because even if you lose this home, there is at least your husband's home, so it's not that you have to rent anywhere.
Now, when you say you're using credit cards to make ends meet, it's something serious and your finances are not in control then. Well, I suggest you try to look out for a part time job or freelancing at least so that you can carry out daily expenses. Avoid using credit cards for daily spending because this will add on to your debt which you need to pay off.
Now, when you go for deed-in-lieu, it's like you are giving away your property to the first lender. So, the second lender can obviously ask for his payments. Ideally the first lender should pay off the second. But the first may not be able to retrieve the sale proceeds as much as is required to satisfy the balances on both the loans. In such a case, the second lender may charge-off the debt.
To know more on what happens to the second after deed-in-lieu on the first , refer to a previous discussion on this topic.
Thanks.