What Does "Deed in Lieu of Property" Mean?
At times, financial difficulties may put you in a position where you can no longer afford to pay the mortgage on the house you own. In this situation, bankruptcy or foreclosure are two common options to relieve you of your debt obligation. Both bankruptcy and foreclosure will significantly damage your credit rating. Financing another home purchase after a bankruptcy or foreclosure is often either impossible or very expensive for several years. A deed in lieu of property is another option that allows you to get out of your mortgage and may cause less harm to your credit profile.
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Deed in Lieu
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A Deed in Lieu (DIL) is when you deed the collateral property to your mortgage company. In doing so, the mortgage company releases you from the obligations of the mortgage. The DIL benefits both parties by saving some of the costs associated with traditional foreclosure proceedings. With a DIL, you will not receive money from the proceeds of the sale of your house. All proceeds will go to your mortgage company. The DIL does, however, absolve you of your mortgage debt. In most cases, however, if you can afford to make payments on your existing mortgage, the mortgage company will not accept a DIL.
Process
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To start the DIL process, contact your lender to see if you qualify. If your mortgage company accepts a DIL, you will list your property on the market for 90 days at a price agreed to by the lender. If the property does not sell, the lender can cancel the DIL. If your property does sell, you will proceed with the sale transaction by completing the necessary paper work with a local title and escrow company. Sign all the appropriate paper work and make sure that the lender relinquishes the right to sue for a deficiency of judgment. This means the lender can't sue you for the difference between the sale price and your mortgage balance. The lender should agree to this in writing. Finally, you sign a new deed for transfer of ownership to the purchaser of the property.
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Equity
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With a DIL there is no equity in your home, as you owe more money on your mortgage than your home is worth. The entire amount of proceeds from the sale will go to the lender to partially pay the balance owed on your mortgage. However, the DIL does clear the balance on your mortgage account. If you have equity in your property, do not pursue a DIL. Sell your home, refinance or apply for a loan modification.
Tax Implications
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Two kinds of taxes come into play when pursuing a DIL. A deed tax or transfer tax is the tax you may have to pay, depending on your local municipality for transferring the title to the purchaser. You also may assume federal income tax liability for the canceled debt. Your accountant can help determine the implications based on your property and income.
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