What is a Deed in Lieu of Foreclosure (also known as Mortgage Release)?
A deed in lieu of foreclosure is a foreclosure alternative. Similar to a foreclosure in that it is still a negative mark on your credit and you still surrender the property in question; a deed in lieu of foreclosure involves the voluntary surrender and transfer of title back to the lender. In exchange for the voluntary transfer, the lender cancels any remaining debt owed on the property.
What are some benefits of a Deed in Lieu of Foreclosure?
With a deed in lieu of foreclosure, the lender does not have to go through the foreclosure process to recover the property. A deed in lieu of foreclosure is typically beneficial to both parties to the transaction. For the lender, the foreclosure process can be very costly and time consuming. A deed in lieu of foreclosure allows the lender to take back the property quickly and efficiently with little out of pocket expense. For the borrower, they benefit by not having the foreclosure mark on their credit, and in addition usually has the remaining balance owed on the loan cancelled.
A deed in lieu of foreclosure allows you to usually eliminate your remaining mortgage debt and avoid the negative impacts of a foreclosure. You are also able to start rebuilding your credit score quicker than if you opted for a foreclosure. There are also many other benefits to choosing a deed in lieu of foreclosure.
Contact Jeffrey Larkin, an experienced debt-relief attorney to discuss the options that might be best for you.
Qualifications for a Deed in Lieu of Foreclosure:
In order for a creditor to consider a deed in lieu of foreclosure, the debt owed to the lender needs to be secured by the actual property that is to be transferred. A borrower cannot use any other property for the transfer as collateral, unless it is also secured under the same loan.
Approval – Both the lender and the borrower must mutually agree to the transfer. It is most often that a lender will prefer cash rather than real estate. This is especially true if the lender already owns lots of other foreclosed properties. The lender has the right to cancel a deed in lieu if the current fair market value of the property is no longer equivalent with the outstanding loan balance. However, if it appears that the foreclosure process would be more costly, lenders will most likely move forward with a deed in lieu of foreclosure to avoid unnecessary expenses on their behalf. An experienced debt relief lawyer can help facilitate a deed in lieu of foreclosure and ensure that favorable results are achieved for the client.
Disadvantages of a Deed in Lieu of Foreclosure
Taxes – One downside to a deed in lieu of foreclosure that is often overlooked is the possible taxable consequences of the forgiveness of this debt.
Under current federal law, whenever a creditor forgives a loan balance of $600 or more, a requirement exists to file a 1099-C cancellation of debt. This cancellation of debt by a lender creates a significant additional tax liability for the borrower because the debt that is forgiven is treated as if it were income. For example, a lender who forgives a $100,000.00 balance on a loan will file a 1099-C which will be added to any other income you made in the same calendar year. The total amount is considered income for which you are required to pay income taxes on.
This large amount of forgiven debt oftentimes puts borrowers into a higher tax bracket as a result, forcing them to pay more money at a higher rate than they otherwise would have had to. The Mortgage Forgiveness Debt Relief Act of 2007 came into effect to provide some tax relief for homeowners with their forgiven debt, however, unless this debt relief act is reinstated it was only extended into the year 2013. You should consult with a debt relief lawyer for assistance if you are considering a deed in lieu of foreclosure (mortgage release).
Affect on Credit – Although there are many myths surrounding the effects on credit between a foreclosure and a deed in lieu of foreclosure; your credit score will be affected either way. It is possible for your credit score to drop 85 to 160 points after opting in for a deed in lieu of foreclosure.
Acceptance of Deficiency Balance – The issue of most importance with a deed in lieu of foreclosure is whether the lender will actually agree to waive any deficiency balance (the amount of the loan that may remain after the house is sold). This is where hiring a debt relief attorney who specializes in deed in lieu of foreclosures plays an important role.
Knowledgeable debt relief attorney Jeffrey Larkin can assist you with a deed in lieu of foreclosure and can provide all the information you need to make an informed decision. Contact the Larkin Law Firm today to get started on the best approach for your needs.