Deed in Lieu is one of the four options one can exercise, if the Debtor has decided that they want to give up their property or can no longer afford to pay the periodic installments and accrued debt. The other three options are Foreclosure, Short Sale and filing for Bankruptcy under Chapter 7 or Chapter 13.
In simple terms, Deed in Lieu is another name for a voluntary agreement to repossession of the property to the lender, where the Lender frees the Debtor by cancelling the remaining mortgage. This is done by the mutual consent of the Debtor and the Lender instead of proceeding for a lengthy Foreclosure process wherein the lender to sue the homeowner. This is a legal deed which is recorded for public records in the county court.
This process has a few risks involved, based on the terms of agreement stated in the Deed. For example, the Lender can, against the homeowner, seek deficient judgment, in case there is still some unpaid debt after the property is finally sold.
Important requirements for the Deed in Lieu
It is noted often that the Deed in Lieu agreements do not have a high rate of success. This is why it is important that the Lender must consider important details before agreeing to enter the agreement. For example, the borrower is genuinely facing hardships like job layoff, divorce, physical/mental illness, lack of financial resources, failure to sell etc.
Expectation from the property owner is that the property is not an abandoned one (Uninhabited and in dilapidated condition) nor is it an investment or commercial property. Also, the real estate must be handed over in good, salable condition. The Lender can expect an inventory list on the property and a conditional statement to the Deed in Lieu.
Repercussions from Income Tax
It is important to note that more often than not, the IRS plays a significant role in Deed of Lieus as the property sales may fall short in covering the mortgage value and often result in “forgiveness” of the deficient amount. Such relief could be judged as an income for the borrower, from the income tax stand point. This point often needs to be cleared by the borrower with his tax consultant, so they can adequately prepare for any such consequences so as to take an informed decision. However, the “Mortgage Forgiveness Debt Relief Act of 2007” signed by President Bush is aimed to relieve Homeowners of the financial burdens for a specific duration in which they can exercise the opportunity to refinance. This is likely to ensure a higher of Deed in Lieu success rate