Deed in lieu helps you stay away from foreclosure

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).

The agreement for deed in lieu of foreclosure 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 deed in lieu foreclosure 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 do not 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.

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 than a deed in lieu.

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.

Deed-in-lieu of foreclosure can be an option to avoid foreclosure

Foreclosure can be one of the most painful financial experiences for any customer. Not only do you lose your home in foreclosure, but it can have a long-lasting impact on your credit rating. It is always advisable that you do all you can to avoid foreclosure as much as possible because foreclosure is a serious situation with serious repercussions such as derogatory information on your credit report. The recession of recent years has resulted in great financial hardship for thousands of Americans and this has unfortunately given rise to an alarming increase in the incidents of foreclosures. While this has resulted in a lot of pain for the thousands of people who have been affected, many people have resorted to options such as deed-in-lieu of foreclosure in order to avoid foreclosure.

While through a deed-in-lieu of foreclosure you would be able to avoid a foreclosure, this is never an option for those who are looking for ways to save their home. This is because in this process, the home must be moved out of. In the deed-in-lieu of foreclosure process, the homeowner gives the deed of the house to the lender who in return agrees not to pursue legal court ordered foreclosure proceedings. The deed is turned over to the lender once the parties have completed a written agreement that details the terms and conditions. If you are wondering what this deed is, it is a publicly recorded document that states who owns the property in question. So when you offer a deed in lieu of foreclosure, it means that you as homeowner will voluntarily sign over the deed to the lender giving them the ownership of your house.

Even though you would be able to avoid a foreclosure through a deed-in-lieu of foreclosure, it would definitely have a negative affect on your credit, although a bit lesser than having a home foreclosure on your credit report. Although you gave the deed back willingly, it would still signify that you couldn’t make your payments and the lender had to come after you. Also, by the time the lender will accept the deed in lieu of foreclosure, you would have missed several payments, and the damage would have been done.

As mentioned earlier, both the options would have a negative impact on your credit and getting mortgage after foreclosure or deed-in-lieu of foreclosure can be quite difficult if not impossible. You would need to be well-versed with the steps in buying a home after foreclosure if you want to increase the chances of approval. The good thing is that it is possible to rise from a bad credit situation. It is advisable that you consider the following when applying for a mortgage after having gone through a foreclosure:

Remember that foreclosure can have a huge negative impact on your credit. In addition to the stigma that is associated with foreclosure, you may also have to deal with the fact that it is difficult to obtain any type of credit, especially a home loan immediately following a foreclosure. Yet, since many factors contribute to the inability to repay a mortgage loan, you may still be able to afford a new home loan even after experiencing a foreclosure. Your experience with foreclosure (or near foreclosure such as a situation where you were forced to go for deed-in-lieu of foreclosure in order to avoid a foreclosure) might have been due to loss of employment, but you may be able to handle a new mortgage after you have found a new job. While your affordability may be your part of the story, in order to convince the lenders about this, you must make sure that you have rebuilt your credit before you apply for a mortgage.

Make sure that your debts with your existing creditors have been taken care of. Since rebuilding your credit after experiencing foreclosure is so important in order to get approved for new loans, you must make sure that you pay your other bills and creditors on time. Any late/ skipped payments will cause further damage to your credit rating. Shop around for mortgage lenders who are willing to lend to high risk customers

When applying for a mortgage loan after a foreclosure, many traditional lenders will not approve a loan request. But there are lenders out there who specialize in lending to high risk borrowers who have a difficult time securing financing. It may therefore, be a good idea for you to shop for such lenders as an alternative.

There can be various creative ways to avoid foreclosure besides a deed in lieu. It may be well worth the time to investigate these options before you decide to give the deed back. It is important that before taking your decision, you consider all your options that can keep you in your home and salvage your credit.

About the Author
By Mortgage Guru, submitted 2010-11-23

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