|Deed In Lieu Of Foreclosure
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 no longer make your payments. The lender then sells off the property in order to retrieve a part or whole of the loan balance you owe. This process would result in the homeowner losing his or her home without going into foreclosure.
How does a Deed In Lieu work?
When you apply for a deed in lieu of foreclosure, your goal is simply to avoid foreclosure. At this point, you have already come to grips with the fact that you are going to lose your home. You will need to sign a few legal documents such as the "Agreement In Lieu Of Foreclosure", a "Warranty deed" and a "quit claim deed" or a "grant deed". The Agreement In Lieu Of Foreclosure 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, transfers legal ownership of the property to the lender or bank.
The lender marks the borrower's mortgage as "paid" and provides the borrower with documentation which states that the debt is canceled. In addition, the documentation waives the bank's rights to claim any unpaid balances even if the sale of the property does not cover the loan balance.
The agreement for deed in lieu of foreclosure is handled by an escrow company which receives the borrower's note (marked as "paid") from the lender. The escrow company records the deed sends the note to the borrower. The borrower is now free from the liability of the mortgage payments.
What are the tax implications of a Deed In Lieu Of Foreclosure?
A Deed In Lieu may result in the former homeowner having two pay two kinds of taxes...
1. Deed tax: The Deed In Lieu Foreclosure is not just the cancelling of a mortgage, it is also a transfer of property. As a result, the borrower needs to pay state deed tax when the property is transferred 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 actual market value of your property and your mortgage balance plus liens removed from the property due to deed in lieu. It may vary by county or state so check with your local government.
2. Income tax on canceled debt: As per Mortgage Debt Forgiveness Tax Relief Act (applicable till the end of 2018), you do not need not pay tax on canceled debt that is the result of a deed in lieu.
How Will A Deed In Lieu Of Foreclosure Impact Your Credit Scores?
When you complete a deed in lieu of foreclosure, it does negatively impact your your credit score. Your score declines by 250 points or more. You can rebuild your credit scores but the deed in lieu still will be referenced on your credit report for 7 years. At the end of the 7th year, you can request the bureaus to remove it from the report.
How Long After A Deed In Lieu Can You Purchase Another Home?
You can purchase another home right away if you somehow had cash, but the real question is whether you can get a mortgage. Lenders will most likely NOT want to lend to you for a few years. However, quickly improving your credit scores will improve your chances. It will show the lenders that you are taking your credit seriously. Guidelines are changing weekly, so check with the lender to see exactly what their waiting period is after a deed in lieu.
Is A Loan Modification Better Than A Deed In Lieu Of Foreclosure?
Yes, a loan modification is MUCH better than a deed In lieu of foreclosure. First of all, you will get to stay in your home. Secondly, your interest rate and payments will likely be reduced so the payments can be more affordable or the lender may also reduce the loan balance. Finally, your credit will not be adversely impacted. So, yes this is a much better option. The problem is dealing with the lender to negotiate the loan modification.
However, if your income still cannot support the new proposed loan modification, then a deed in lieu of foreclosure may be the only option.
Hopefully this has helped to answer your questions regarding a Deed In Lieu. Check back often because we are always updating this information and providing additional feedback.
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