A deed in lieu of foreclosure is an alternative to foreclosure or a short sale. A deed in lieu is the process of a home owner transferring ownership of the property to the lender in exchange for the mortgage loan being cancelled. This is done by signing over the deed to the lender.
Depending on the circumstances, a deed in lieu may be the best option if a home owner can no longer afford their mortgage payments and it definitely beats foreclosure.
A deed in lieu of foreclosure cannot just be done at random because a homeowner doesn't feel like paying for the home anymore. Remember, you are contractually obligated to pay back the loan, and forfeiting your deed is not a right.
There are certain circumstances that must be met in order for the deal to be possible.
Some additional requirements of a Deed in Lieu of Foreclosure include:
A deed in lieu does have some advantages to it. For the home owner, it relinquishes their responsibility to repay the loan, which can help lift a burden off of them.
It also helps them avoid dealing with a foreclosure. As we know, a foreclosure is the worse way to get rid of a property. The process is long and stressful, so any opportunity to avoid it should be looked into. Also, a deed in lieu looks a lot better on your credit than a foreclosure.
For the lien holder, you have the opportunity to get back some of the money for the property by reselling it. If the lender is fortunate enough to get anything close to what was owed on the property they may be able even make a gain from the deal.
There are a lot of disadvantages that go along with a deed in lieu of foreclosure. Perhaps the biggest is the damage it does to your credit. Generally you are pursuing a Deed In lieu because you have missed a mortgage payment which also harms your credit.
If the value of the property is less than the amount that is owed, the creditor may end up having to "forgive" the difference. This can be a big downside of doing a deed in lieu of foreclosure deal. Creditors are required to report any debt "forgiven" over a certain amount to the IRS with a 1099C form.
This may leave the former property owner with the responsibility to pay taxes on that forgiven amount. There are certain stipulations that may help avoid this, but it differs with each individual situation.
As you can see, doing a deed in lieu of foreclosure contract has its positives and negatives. When faced with either a foreclosure or giving up the deed, this may be the best option for you.
You can also consider a short sale, or see if you can work out something with your bank to help ease the burden. Do not make the mistake of thinking doing a deed in lieu of foreclosure contract is the easy way out of your mortgage.
The damage it will do to your credit and possible tax issues are factors you have to take into consideration. If all other options have been exhausted, bring up the idea of a deed in lieu of contract to your lender and hopefully it will all work out for the best.