With a deed in lieu, you are handing over the deed to your property instead of going through the foreclosure process. This means you will no longer own the home at all and will no longer be responsible for the mortgage payments.
The deed in lieu process has to be completely voluntary on the part of both the homeowner and the lender. Many lenders require the owners to write/sign a statement indicating they are participating in this procedure voluntarily.
Why would you even want to consider this option? The primary reason is that once the process is completed, you are completely released from any debt associated with that particular loan. You will not have any mortgage payments or back payments hanging over your head.
Also, deed in lieu is not a foreclosure so there’s not the same negative connotation associated with foreclosing on a loan. Even your credit does not suffer nearly as much with this procedure as it does with actual foreclosure.
You may even get much better terms through the deed in lieu than you would with foreclosure. Many people aren’t aware that when they foreclose on the house, they could still be held responsible for any liens or other mortgages. You do not have that issue with the deed in lieu of foreclosure.
This is also better for the lender. Foreclosures are costly and can take quite a bit of time to be completely processed. During that time, some people will take advantage and will destroy the property. This means that the lender loses out on the full mortgage and also has to pay for repairs.
There are two primary forms associated with the deed in lieu of foreclosure: the Agreement in Lieu of Foreclosure, and a form of the deed.
The Agreement in Lieu of Foreclosure is the actual document which details the terms and conditions of the deed in lieu. It identifies exactly what is being transferred to the lender. This document will be signed by both parties involved.
The other document involved is the deed. The deed could be in the form of a Warranty deed, a quit claim deed, or a grant deed depending on your state and county. All of these versions are essentially the title to the property stating who actually owns the property. This form will ultimately go to the lender.
The homeowner will also get a form which officially says the mortgage debt is canceled. This proves that you no longer have to make any payments on the property, and the transfer of the deed shows that you no longer have any ownership interest in the house.
You will also receive some sort of waiver to the right of deficiency judgment. This is a vital piece of paper for the homeowner. This waiver means that the lender can not come back and try to get you to pay for any monetary difference if they have to sell the house for less than was owed.
After you have received your formal cancellation notice and the waiver of right of deficiency judgment, you might still be liable for taxes. This will depend entirely upon your state and the circumstances of the sale. It would be best to consult with a tax professional to find out all the details.
In some states, when a property changes hands the original owner is responsible for paying the deed tax. This tax is figured by using the difference of the current market value of the home minus the mortgage balance and any liens on the property.
You probably will not have to pay income tax on the property to the US government though. Through the end of 2009, the Mortgage Debt Forgiveness Tax Relief Act states that property changes through deeds in lieu of foreclosure do not have to pay federal income tax.
However, there are a few stipulations to this act. The home must have been your main residence for at least 730 days. This time doesn’t have to be concurrent. The deed in lieu has to have been processed between 2007 and 2009. The debt relief cannot equal more than $2 million. The forgiven debt money has to be used either on that property or for paying off other debts -- you cannot simply pocket any money gained from this process.
Yes, facing the loss of your home can be emotionally stressful, but it does not have to completely ruin your financial future. By utilizing alternative methods such as the deed in lieu, you can come out much better than with a foreclosure.