What Is a Deed in Lieu?
Homeowners who find themselves in dire financial straits may wish to consider using a deed in lieu. The term “deed in lieu” is short for deed in lieu of foreclosure, and like foreclosure, a deed in lieu is a last-resort option.
Similar to a short sale, a deed in lieu applies only to homes that are under water. This means that the homeowner owes more on the mortgage than the home’s current value. While both a short sale and a deed in lieu have a negative effect on a homeowner’s credit rating, neither carries the extreme consequences associated with foreclosure and bankruptcy.
When a mortgage lender and a homeowner agree to a deed in lieu, a transfer of property and a forgiveness of debt occur. A mortgage lender may agree to a deed in lieu in order to save the time and money involved in foreclosure proceedings.
Deed in Lieu Details
Homeowners who enter into negotiations for a deed in lieu of foreclosure should expect the following actions to occur:
• The homeowner must ensure that there are no liens on the home. This means that any second or third mortgages must be paid in full.
• The lender stops any foreclosure proceedings or agrees not to begin new foreclosure proceedings.
• An appraiser and/or real estate professional will determine the home’s actual value.
• The lender determines the amount of deficiency forgiveness. From the homeowner’s perspective, the lender will ideally forgive the difference between the amount of money owed on the mortgage and the home’s assessed value.
• The borrower gives the lender the deed in lieu of foreclosure. This transfers ownership to the lender, who can now sell the property for its assessed value.
Deed in Lieu Drawbacks
While an ideal deed in lieu leaves the homeowner debt free, sometimes the lender can reserve the right for a deficiency judgment. This means the lender can sue for the unpaid difference between the original mortgage and sale price of the home. To avoid this situation, homeowners should read any agreements carefully. Hiring an attorney to assist with the transaction is also a smart idea.
A deed in lieu settlement also carries a tax disadvantage. Any time a debt is forgiven, that forgiveness is actually a financial gift, and gifts are taxable.
Finally, lenders often prefer a short sale to a deed in lieu since vacant properties deteriorate quickly and lose value. To qualify for a deed in lieu, a homeowner may be required to list the home for at least 90 days first.
Under water mortgages are more common than ever during this sluggish economy. Thankfully, there are some alternatives to foreclosure if homeowners and lenders are willing to work together for a solution.