Avoid Foreclosure with Deed-In-Lieu

Real Estate Agent with Dunes Marketing Group

A common way to protect your property from being taken away by the lender on account of non-payment of your mortgage is a deed-in-lieu of foreclosure.

Deed-in-lieu is a process in which the borrower failing to satisfy the loan obligation hands over his property to the lender. The lender may then sell the property in order to retrieve a part or whole of the amount borrowed from the sale proceeds.

What is the process all about?

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 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.

Does a borrower need to pay tax in the process?

Once a borrower gets a release from the loan, he may have to pay deed tax provided he doesn't qualify for the tax relief under the Mortgage Debt Forgiveness Tax Relief Act applicable till the end of 2009.

As per the Act, one need not pay tax on canceled debt (unpaid loan balance which is forgiven by lender) resulting from deed in lieu. The tax is calculated on the basis of unpaid balance.

Now, even if the lender may not collect deficiency, the borrower may pay cash towards the unpaid debt to avoid a negative impact on his credit report. This extra cash serves to reduce the amount of unpaid debt which is the basis of the deed tax.

It may happen that the lender pays the borrower a certain sum of money in return for the deed-in-lieu when there is some equity in the property. In such a case, the cash offered to the borrower is added to the unpaid debt in order to determine the basis of the deed tax.

More questions? Contact me at HiltonHeadJR@aol.com if you need more information regarding foreclosures, short sales, etc.

Comments (2)

Steve Loynd
Alpine Lakes Real Estate Inc., - Lincoln, NH
800-926-5653, White Mountains NH

John, great explanation for the new kids on the block, I just wanted to add. I have a prior seller who held a note (private mortgage), and he has offer his prior buyer a good sum of money to sign a deed in lieu of foreclosure. Strangely enough the borrower so far has had no interest in signing off, even though he is 10 month late and will loose all the equity at foreclosure which is now imminent. This was a "get out a jail free card" that he just burned..crazy ?

Nov 15, 2008 06:20 AM
Teresa Berry
Seattle, WA

John this is an alternative for some borrowers who are unable to afford staying in their homes - information here to help understand the potential options. Good Stuff! Thanks!

Dec 11, 2008 10:34 AM