Deed in Lieu




What is a deed in lieu?


Deed in lieu of foreclosure is a process in which you give away your property to the lender because you just can't pay any more. The lender then sells off the property in order to retrieve a part or whole of the loan balance you owe.


How does deed in lieu work?


When you go for a deed in lieu in order to avoid foreclosure, you need to sign legal documents such as the Agreement in Lieu of Foreclosure and a Warranty deed, quit claim deed or a grant deed.

The first document reveals 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 latter with two forms - one which states that the debt is canceled and the other which refers to the waiver of the right to a deficiency judgment (the lender's right to ask for the unpaid debt amount if it is not recovered totally by the property-sale).

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 used for transferring legal ownership of the mortgaged property and sends the note to the borrower. The borrower is thus released from the liability of the mortgage payments.


What are the tax consequences?


When you go for deed in lieu, you may have to pay 2 types of taxes. These are:

  • Deed tax: Since deed in lieu foreclosure involves transfer of property, the borrower needs to pay state deed tax upon conveyance of property to the lender. The deed tax is $1.65 for 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 liens removed from the property due to deed in lieu. It may vary from one county to another.

  • Income tax on canceled debt: As per Mortgage Debt Forgiveness Tax Relief Act (applicable till the end of 2009), one need not pay tax on canceled debt (unpaid loan balance which is forgiven by lender) resulting from deed in lieu. However, a borrower needs to satisfy certain conditions for mortgage tax relief.


Is loan modification better than deed in lieu?


Mortgage loan modification is surely a better option than deed in lieu foreclosure as because it helps you keep your home. At the same time, you can save your credit from taking a big hit. That's because loan modification allows you to negotiate for lower rate on your mortgage. You may also get a principal reduction on your loan.

If you have missed payments, they can be added to your loan balance and the term extended so that your monthly payments become low and affordable. So, loan modification is no doubt a better choice as compared to deed in lieu.

However, if you don't have surplus income to meet your monthly payments, you won't be approved for loan modification. In such a case, deed in lieu becomes your obvious choice