Deed in Lieu of Foreclosure FAQ's
Q. What is a Deed in Lieu?
A. In its most basic terms, a deed in lieu of foreclosure (DIL) is a deed where the borrowers convey all of their interest in a parcel of real property to the lender to satisfy a loan that is in default and to avoid foreclosure proceedings. Completing a DIL releases the borrowers from all obligations under the mortgage.
Q. Why would someone want to do a DIL?
A. A DIL offers several advantages to both the borrowers and the lender. The principal advantage to the borrowers is that it immediately releases them from most or all of the personal indebtedness associated with the defaulted loan. The borrowers also avoid the public notoriety of a foreclosure proceeding and may receive more generous terms than they would in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of foreclosure.
Q. Under what circumstances will a lender accept a DIL?
A. As we all know, the economic environment is constantly changing, and lenders’ openness to accepting DILs is varied. A DIL may not be possible if:
• You can afford to make payments;
• You are in the process of declaring bankruptcy.
Q. Will the lender require that I try to sell my home first?
A. Perhaps. Sometimes lenders will require the borrower to attempt to sell his/her home for its fair market value for at least 90 days before a mortgage company will consider this option.
Q. What if there are other liens (for example a tax lien) on my property?
A. A DIL may also not be an option if there are other liens on the property, such as second mortgages, judgments from creditors, or tax liens. But there are some exceptions and the feasibility of a DIL will be dependent on the facts of your particular circumstances.
Q. What if the house is worth less than what I borrowed? Will I have to pay the deficiency if I complete a Deed in Lieu of Foreclosure?
A. It depends on your state. In Massachusetts, the lender is allowed to pursue a deficiency judgement in situations involving home mortgages. This is why it is critcally important to have an attorney negotiate a DIL, and draw up an agreement that the lender states that it forgives any deficiency.
Q. Will I incur tax liability on the amount of forgiven debt after the lender takes back my home under a Deed In lieu of foreclosure?
A. It depends. If the DIL is for your primary residence, Congress has passed legislation forgiving debt in this situation, if you meet other qualifications as well. If the DIL is for an investment property or second home, most likely any omount of debt forgiven will be included in your includable taxable income for the year of the DIL.
My goal is to make the DIL process as painless as possible. If you have further questions, or want to discuss your individual circumstances, please contact me for a free evaluation
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