A deed in lieu of foreclosure is one of the several methods you can implement to stop foreclosure.
In times of economic crisis many people face the fact that they cannot pay for the homes they bought years ago. Overextension of credit, loss of jobs, and many other factors have left many families fearing foreclosure and unaware of the foreclosure alternatives they could be taking advantage of. One such option is called a deed in lieu of foreclosure.
You have probably heard this term before, but there is a very good chance that no one has explained it to you. Here is some basic information on deeds in lieu of foreclosure and what they could do to help you in avoiding foreclosure.
What is a deed in lieu of foreclosure?
A deed in lieu of foreclosure is an option where homeowners voluntarily give up their collateral in exchange for being released from all their mortgage obligations. If you can make your mortgage payments, however, there is a good chance that you will not be accepted for this option.
Basically, if you know you are going to lose your home and foreclosure is certain, you can choose to turn over the deed without going through the whole foreclosure process. Since that process is painful and unpleasant for the homeowner and expensive and difficult for the bank or lending society, it is an easier method than dealing with the foreclosure process.
Benefits of a deed in lieu of foreclosure
Under the right circumstances, it can be a big help to the borrower and the lender alike:
- If the lender accepts your deed in lieu of foreclosure, you benefit from not being responsible for any short fall.
- In a housing market where prices are frequently lower than the ones you originally paid for the house, this is a way of not ending up having to take a short sale.
- Generally, you have ninety days to complete the process of transferring the deed once the process has bee initiated.
Not everyone qualifies for a deed in lieu of foreclosure
However, you should be aware that there are some reasons your lender might not accept your offer to transfer the deed to avoid the foreclocure process. For instance:
- If it looks like you can pay the difference between the mortgage and the market value of the house, you may be required to do so.
- If it looks like you are letting property foreclose because it is more convenient to do so, rather than out of real financial problems, you may also be refused.
- If you have a home equity loan, mortgage, or other lien on your property, you will not be allowed to do this, either.
However, for many people, a deed in lieu of forclosure is a much less difficult foreclosure alternative.
Who qualifies for a deed in lieu of foreclosure
Before most lenders accept a deed in lieu of foreclosure arrangement, you will have to attempt to sell the house for a period of time —generally three months on the market will do it. That is because the bank or lending organization would rather have you try to sell the house than having to sell it on their own.
Filing a deed in lieu of foreclosure and tax considerations
There are also tax issues when you get your lender to accept a deed in lieu of foreclosure. You may be perceived by the IRS as having made money on the deal via your equity, and can be taxed on it.
The lender will send a form to the IRS, and you will need to make arrangements for dealing with the resultant tax —hiring a good accountant is worth it in this case.
In addition, there is an act that gives homeowners relief from this taxation on some loans during the tax years of 2007, 2008 and 2009.
A deed in lieu of foreclosure is one of several foreclosure stop alternatives. Keep in mind thoughthat it does not save your house and you should thus see this deed in lieu as a last resort.
However, if you are unable to apply or do not qualify for any other foreclosure stop method, ask your lender to accept a deed in lieu of foreclosure and you will be spared the foreclosure process trouble. Your lender can facilitate the deed in lieu of foreclosure form you need to file to start the process.