Deed in Lieu of Foreclosure
A deed in lieu of foreclosure allows you to give the deed to your home to the lender. In exchange, the lender agrees not to foreclose on the property. The lender will consider a surrender of the property as payment in full of the mortgage. This option can be favorable to a lender since it saves time and legal fees.
What should you consider when thinking about deed in lieu of foreclosure?
- You need to be delinquent on your payments in order to be eligible for a deed in lieu of foreclosure.
- Any equity that you may have in your home will go to the lender.
- The lender may be able to sell the home for a profit if there was equity in your home.
- Some lenders may want proof that you have tried to sell your home within the last 12 months before considering a deed in lieu of foreclosure,
- If you have a second mortgage, it is important to make sure that both your first and second mortgages will be satisfied in full upon submission of your deed to the lender.
How will a deed in lieu of foreclosure affect your credit?
A deed in lieu of foreclosure will not improve your credit score, but it does not adversely affect it as much as a foreclosure. By offering your deed to the lender, you also may try to negotiate not having any foreclosure proceedings listed on your credit report. Once the lender is in possession of the property, your credit score will reflect only the mortgage payments that you have missed. Since the foreclosure process can take several months, the amount of payments that you are unable to pay under a deed in lieu of foreclosure often is less than when your home is foreclosed on.
What are the tax implications of deed in lieu of foreclosure?
If your home is not your primary residence, you may have to pay taxes on the deficiency amount. The deficiency amount is the difference between the amount owed on the mortgage and the value of your home.
The Mortgage Forgiveness Debt Relief Act of 2007 addresses the issue of the tax implications of a deed in lieu of foreclosure. Through 2013, the act provides that you do not have to pay federal taxes on the deficiency amount if:
- The deed in lieu of foreclosure is for your primary residence;
- The original loan was used to purchase, build or improve the primary residence; and
- The original loan is secured by your primary residence.
You also may avoid tax liabilities if:
- You are insolvent (have more debt than assets) at the time the deed in lieu of foreclosure was facilitated; and
- You filed for bankruptcy prior to the closing on your home.