Many are looking for ways out of their mortgage and interest rates reset. To avoid foreclosure, many times Deeds in Lieu of foreclosure is often used to avoid foreclosure but leave a question in many homeowners minds, if this really is a good option.
A deed in lieu of foreclosure is when the homeowner transfers the title of the home back to the lender through a ‘quitclaim deed’. The lender is able to gain the title to the property without going through the enormous expense of a foreclosure. This process cannot be done without the lender’s agreement and consent, which can be hard to receive from the lender or bank.
Why? If there is a 2nd mortgage, judgment liens, tax liens or any claims against the property, they would remain following a transfer of the deed and the lender may have issues with selling the property with the outstanding liens. When a foreclosure happens, it cleans out these liens, thus making it a preferable option for many lenders to get a marketable property with no unforseen problems.
If the lender does agree to the transfer, the deed in lieu of foreclosure does not eliminate all obligations under the mortgage (unless agrees) as it only transfer the title to the lender or bank. If you do not negotiate otherwise, your state laws may make you still liable for deficiencies which result from the sale of the property.
In addition, the deed in lieu of foreclosure can seriously hurt your credit score at approximately 200 credit points, making it equal to a foreclosure and bankruptcy.
Many lenders will issue a 1099-C for any agreed upon forgiven debt from the deed transfer. You must be qualified and file a special form with the IRS and your state tax authorities because you may owe taxes on the forgiven amount.
Check with an experienced lawyer to properly advise you before doing anything.
Susan
July 30, 2008
This is very helpful, especially to those unfamiliar to this territory…which would make it a whole lot of Americans (especially right now).